The rules for China's new bourse could give investors more opportunities to invest in A-shares. Experts believe that if the members of the new board become part of the Stock Connect Scheme in the future, this could improve investor access to China A-shares. 

Beijing Stock Exchange, which is China's third, bourse, unveiled two sets of basic business rules on transactions and bourse member management on November 2. Detailed guidelines covering financing, mergers and corporate supervision came out on the same day, with the China Securities Regulatory Commission (CSRC) announcing that all the measures would take effect on November 15.

The bourse, which has been set up as a market for technologically advanced small and medium sized firms, will initially be based on the National Equities Exchange and Quotations (NEEQ) Select.

Sixty six NEEQ Select firms with a total market cap of Rmb185.8 billion ($29 billion) will be transferred to Beijing Stock Exchange, according to data provider Wind.

The NEEQ is an over-the-counter national stocks trading market, providing an alternative for Chinese small and medium size enterprises (SMEs) not listed on the Shanghai or Shenzhen stock exchanges.

ROUTE TO STOCK CONNECT

Wang Hanfeng, CICC

Launched in April 2014, the Shanghai-Hong Kong Stock Connect scheme is a securities trading and clearing links programme which provides mutual market access between the Mainland and Hong Kong.

“There are no guidelines regarding whether to include Beijing-listed stocks into the stock connect in the initial rules of Beijing Stock Exchange. But given China still aims to further open up the capital market, we believe it’s possible that Beijing-listed stocks may be added into the stock connect scheme sometime in the future,” Wang Hanfeng, Chief Strategist at CICC, told AsianInvestor.

He believes major A-share market indices such as the CSI300 index is traded slightly below their historical average valuation, and the A-share market may offer mid-long term value at this level. “Overseas investors’ sentiment towards A shares has improved recently, as we have seen consecutive weeks of fund inflow to A shares via the Stock Connect since the middle of October,” he added.

Li Wenlin, senior portfolio manager at Manulife Investment Management (Manulife IM), agreed.

“Looking at the past experience of the development of the Stock Connect Program, we believe the stocks listed in the new exchange are likely to be included in the stock connect program, though this may take some time to happen,” he told AsianInvestor.

The new bourse could be another option for attracting foreign capital in the longer term.

“On one hand, the small & mid-size listed companies in the new board needs capital from overseas via HK, now that listing in the US may not be available. On the other hand, adding those innovative companies to the Stock Connect Program will also enhance the scheme by allowing global investors to take part in the next chapter of China growth story,” he added.

SHIFT TO SME

Li Wenlin, Manulife IM

Regulators have been scrutinising giant names including Alibaba over the past year. This has led to Investors re-considering their strategies of China A-shares as it is no longer the era of “too big to fall”.

“We believe the smaller companies will be a direct beneficiary of more balanced growth as China shifts from a pear shaped economy to an olive shaped economy, benefiting the wider growth of the middle class under the ideology of common prosperity,” Lin said. In his view, the new bourse could therefore likely enrich the universe of China equities as a whole, arousing interests from investors who want to tap into structural growth opportunities, especially those in early stages.

“In the longer term, the enlarged investible universe will complement the opportunity set that is more reflective of the innovation and growth of the underlying China economy,” he explained.