The pending Stock Connect scheme will boost China A-share market liquidity and thus avert certain issues, says Dominic Ho, head trader at CSOP Asset Management, the Hong Kong unit of Shenzhen's China Southern Fund Management.
Trading A-shares for some of the highest-volume exchange-traded funds (ETFs) under the renminbi qualified foreign institutional investor (RQFII) scheme, Ho says the biggest challenge is managing market impact.
“For now, when we have a lot of ETF subscription and redemption orders, it may be challenging to execute these orders due to the illiquidity of some of the A-shares," he notes. "But once the trading link becomes live, starting October, there will hopefully be more participants in the A-share market, which will result in more natural liquidity."
Liquidity is tight because many Chinese equity ETFs – be they physical or synthetic – track the same underlying index, the FTSE A50. That includes the two most popular ETFs: BlackRock’s iShares FTSE A50 China Index ETF and CSOP AM’s FTSE China A50 ETF.
In China, liquidity is especially tight during index-rebalancing days, because – unlike in other Asian markets, such as Hong Kong, Japan and Australia – there is a lack of alternative venues and block crossing platforms, says Ho.
Because many of these ETFs track the same indices, it’s likely that many managers are executing trades in the same direction – that is, buying the same stocks as new constituents are introduced and selling the same ones as they are excluded from the indices.
“If everybody rushes to rebalance their portfolio on the same day, there is always a chance that the share price will be distorted to a level that might trigger a trading halt,” says Ho. Trading is suspended in China if a stock rises or drops by 10%.
As of June 30, CSOP had $7 billion in assets under management and had received Rmb42.6 billion ($6.9 billion) in RQFII quota. This has allowed the firm to directly trade the A-share market from Hong Kong using offshore renminbi, rather than accessing it through P-notes or swaps issued by brokers holding QFII quota.
Ho’s team – comprising bond dealer Jewel Ye and Kerry Zhang, who trades American depository receipts – also trades Hong Kong H-shares and ADRs for the firm’s alpha strategies.
The Stock Connect scheme, announced on April 10, will allow Hong Kong and other offshore investors to trade all SSE 180 and SSE 380 stocks directly through the Hong Kong exchange without needing quota. Likewise, mainland investors will be able to trade all 266 stocks of the Hang Seng Composite Large Cap and Hang Seng Composite MidCap indices directly through the Shanghai Stock Exchange.
As previously announced, there will be an initial aggregate quota of Rmb300 billion ($48.8 billion) and a daily quota of Rmb13 billion imposed on ‘northbound’ trades – that is, trading of SSE shares by Hong Kong and overseas investors.
* A full interview with CSOP Asset Management appears in the July issue of AsianInvestor magazine.