Chinese pensions look set to continue increasing their investments into Hong Kong-listed equities, particularly into H-shares, as they seek to diversify more offshore and take advantage of the valuation differential between shares listed in the city versus those on mainland bourses. This interest is also likely to draw more international investor fund flows.
In December Beijing widened the investable scope of local pension schemes to include Hong Kong-listed stocks are under the Stock Connect Schemes that link the city's bourse with those in Shanghai and Shenzhen. The new application became effective on January 6, and Chinese asset managers have since launched five retirement products with a focus on this asset class.
More such schemes are expected as both mainland and international investors seek to take advantage of the relatively lower valuations available in Hong Kong compared to China, and the rising array of technology-linked shares becoming available. As of today, over 360 stocks have been included under the Stock Connect Scheme, representing 17% of Hong Kong-listed equities.
Mainland pension funds are expected to bring Rmb600 billion (HK$714.11 billion) inflow to the Hong Kong local market in the long term, according to an estimate by BOC International.
This potential asset flow is certainly a priority to the Hong Kong Stock Exchange (HKEX). In late March it joined the Insurance Asset Management Association of China (IAMAC) and Hong Kong Stock Exchange (HKEX) to host their first-ever online webinar, titled “How to boost more pension funds investing into Hong Kong equities market.”
The event was viewed by over 300 representatives of regulators, insurance companies and asset managers, and was chaired by IAMAC’s vice chair Cao Deyun. He said in a press release that regular such webinars are planned, as the organisation seeks to educate market participants about making investments into Hong Kong stock market under the widened rules.
Ba Shusong, managing director of HKEX, said in the conference that the ability for mainland institutional investors including insurers to invest into Hong Kong shares, and particularly H-shares, will offer them a broader range of offshore assets. He noted that in the longer term the government could allow the National Social Security Fund (NSSF) to invest some of the assets it manages for provincial pension funds into Hong Kong shares. The pension fund, which constitutes the first pillar of China’s retirement system, is not allowed to do so today.
The second pillar of China’s pension system is comprised of enterprise and occupational annuities funds. Since the beginning of this year they have been allowed to invest up to 40% (previously 30%) of their investment portfolios into equity assets, including into Hong Kong equities.
Fund houses have sought to benefit from the rules change by setting up new products that target Hong Kong equities. The first batch of such pension-oriented funds that invest in Hong Kong equities began operations after completing their fundraising in early March.
They include funds ran by Fullgoal Asset Management, Taikang Asset Management, China Southern Asset Management, and ICBC Credit Suisse Asset Management. No data is currently available on how much these vehicles have so far raised for investment into Hong Kong.
The appeal of Hong Kong shares, and particularly those of Chinese companies listed in the city – commonly called H-shares – is likely to rise with international asset owners as well.
Global institutional investors are increasingly looking to expand their exposure to mainland-listed shares (also known as A-shares), in part because the shares are gradually seeing their weighting in many benchmark indices being raised. However, many Chinese companies issue H-shares as well as A-shares, and the former typically have a lower price-to-earnings (PE) ratio.
That, combined with the promise of Chinese pension fund flows, could entice more international investors with lower amounts to invest, believes Stephen Chan, partner at Dechert, a law firm.
“With northbound trading through the Stock Connect Scheme, we would expect there to be an increase in activity in A-shares. However, given the relatively higher PE ratio and valuation of A-shares, there will still be strong investor appetite for H-shares, given that they are typically cheaper,” he told AsianInvestor.
The PE ratio gap between A-shares and H-shares is largely down to differences in the market characteristics of the mainland and Hong Kong stock markets, including varying regulation and different groups of investors. The Hang Seng Stock Connect China AH Premium Index, which tracks this price difference, recorded that the A-shares of firms listed in both China and Hong Kong enjoyed a 33.74% premium on average versus their H-shares.
Some market observers have wondered whether the appeal of Hong Kong-listed shares could be impacted by the city’s government deciding in late February to increase its equity stamp duty by 3 basis points, or 30% over the current fee structure. It marks the first such increase since 1993.
Chan, however, is not concerned. “The proposed increase in stamp duty (when implemented) is comparatively minor and we do not expect it to substantially impact the Hong Kong market in the long run,” he said.
As of mid-2020, China’s enterprise and occupational annuities funds China had Rmb1.98 trillion ($306.58 billion) and Rmb800 billion in assets, respectively, according to an industry report. The NSSF is currently the largest of China’s three pension pillars by assets, with Rmb2.63 trillion under management at the end of 2019, the latest reported figure. It had 90% of its assets invested onshore, and 10% in offshore markets.