CHINA'S plan to give foreign investors unprecedented access to mainland equities through the Shanghai-Hong Kong exchange link has JPMorgan Chase & Co pointing to an unlikely beneficiary - the bond market.
While fixed-income securities are excluded, the link will provide another route to buy Shanghai shares for money managers who already have approval to invest in Chinese stocks and bonds through the Qualified Foreign Institutional Investor (QFII) programme. That frees up some of their US$64 billion quota to be deployed in the debt market, according to JPMorgan.
Investors will be "switching their QFII investments," said Adrian Mowat, the chief Asian and emerging markets equity strategist at JPMorgan in Hong Kong. "You can then use it for things in the fixed-income market."
Nikko Asset Management Co and Principal Global Investors say they're considering such a shift after the bourse link starts on Nov 17, giving anyone with a Hong Kong brokerage account access to Shanghai shares. While approved QFII quotas are equivalent to less than 2 per cent of China's US$4.64 trillion bond market, Deutsche Bank AG says debt issued by railway companies and China Development Bank Corp may attract funds as investors adjust their holdings.
Global holdings of China's onshore bonds climbed 59 per cent this year as the central bank loosened monetary policy to counter an economic slowdown. The nation's sovereign bonds handed investors an average return of 11.3 per cent, trailing only India's performance among Asian markets tracked by Bloomberg World Bond Indexes.
China's benchmark 10-year yield of 3.56 per cent compares with 2.37 per cent in the US, 0.51 per cent in Japan and 0.81 per cent in Germany. The yuan is the only one of 31 major currencies to have strengthened against the dollar since June.
Nikko Asset, which oversees US$168 billion, may free up some of its US$450 million QFII quota for investments that aren't possible under the stock link, said Tan Eng Teck, a Singapore-based senior fund manager for equities. Binay Chandgothia, who helps oversee more than US$30 billion as a managing director and portfolio manager at Principal Global Investors in Hong Kong, said that he faces similar considerations with respect to the firm's US$150 million quota.
The new stock link will allow investors with brokerage accounts in Hong Kong to buy a net 13 billion yuan (S$2.74 billion) of Shanghai-listed shares per day. Railroad bonds and debt issued by China Development Bank may appeal to foreign investors with unused QFII quota, Chang Yuliang, chief China equity strategist at Deutsche Bank, wrote in a note dated Nov 10.
The 10-year bonds of companies under the Ministry of Railways yielded 4.55 per cent on Wednesday, about a percentage point more than sovereign debt, ChinaBond data show. Similar-maturity notes from the three policy lenders - China Development Bank, Agricultural Development Bank of China and Export-Import Bank of China - yielded 3.99 per cent.
Overseas investors held 205.5 billion yuan of Chinese government securities and 214.2 billion yuan of those issued by the policy banks at the end of October, data from China Central Depository & Clearing Co show.
"Clients can assess how strategically they will utilise QFII after the stock connect is formally launched," Hugo Leung, deputy chief executive of BNP Paribas Securities (Asia) Ltd, said on Wednesday in Hong Kong. "They see the stock connect as an extra avenue to get onshore." BLOOMBERG