Shanghai-HK link: A-share daily quota snapped up

Singapore

THE much-anticipated "through train" stock link between the Shanghai and Hong Kong markets took off smoothly on Monday with strong investor demand for China A-shares but weaker mainland demand for Hong Kong stocks.

By 2pm on Monday, so-called "northbound" investors buying Chinese A-Shares have already snapped up the entire 13 billion yuan (S$2.75 billion) daily quota for share purchases. New buy orders were thus suspended for the rest of the day.

Singapore investors also got their feet wet, through facilities offered by several brokers here. Kevin Foy, director of equity sales trading at Maybank Kim Eng, said that it was a very busy morning. "We are seeing buying in consumer, banks and financials, and the energy sectors," he said.

Carol Fong, chief executive of CIMB Securities, said: "Demand, as expected, was not huge, but we expect this to pick up as confidence grows."

OCBC Securities said in a statement that demand for A-shares came from corporate and retail investors who mostly bought bluechip banks.

About 290,000 Singapore Exchange (SGX) China A50 Index futures were also traded, 45 per cent more than the 200,000 contracts traded daily on average last week.

Previously, investors could only get direct exposure to China stocks either through China companies listed in Hong Kong, known as H-shares, or through funds on the qualified foreign institutional investor (QFII) schemes.

Tan Eng Teck, senior portfolio manager at fund house Nikko AM Asia, said that the new link allows fund managers to redeploy their QFII monies previously invested in Shanghai-listed stocks.

"A lot of people are taking advantage . . . to find stocks not in the Shanghai-Hong Kong connect, for example, on the Shenzhen exchange," he said.

Thus, stocks trading on the Shenzhen stock exchange on Monday outperformed those on other exchanges in China, he noted.

Meanwhile, "southbound" demand for Hong Kong stocks from the mainland was tepid, with just under 1.8 billion out of the 10.5 billion yuan quota used up when markets closed.

Reports said that this was partly because retail investors felt the 500,000 yuan minimum capital requirement to trade Hong Kong stocks was too onerous, and that Hong Kong stocks do not offer sufficient diversification. Mainland Chinese investors also cannot use the Hong Kong stock market as a way to transfer money out.

Shares of Hong Kong Exchanges and Clearing (HKEx), which owns and operates the Hong Kong Stock Exchange, fell 4.5 per cent.

Charles Li, HKEx chief executive, said in a Saturday blog post that investors should focus on the infrastructural connection achieved between the two markets instead of relative trading volumes. "The most important thing for us is to get this historic 'train' on the tracks and to depart the station safely. Indeed, whether the initial trains are sold out with large crowds left on the platform or the train departs with some empty seats may not be as important," he said.

A report from rating agency Moody's said that the stock link is "credit positive for Hong Kong". "It reinforces its position as a gateway to investment in the mainland and will increase cross-border financial flows," the report said.

Regulators on both sides have been easing rules before trading began. China's regulators said last week that foreign investors are exempt from capital gains tax for at least three years. A 10 per cent dividend withholding tax is still in place, however.

Shanghai trading hours are from 9.30am to 11.30am, and from 1pm to 3pm. Hong Kong trading hours, meanwhile, are from 9.30am to 4pm. Settlement is T+1. A-share trading will not take place if either market is closed the next day. Investors cannot buy and sell on the same day or engage in short selling. In Shanghai, shares cannot rise or fall by more than 10 per cent a day.

Looking ahead, a Deutsche Bank report said that the launch of the trading link increases the chance for A-shares to be included in major global benchmarks such as the MSCI Emerging Market (EM) index.

This could take place in the next two or three years and boost demand for the shares, the report said.

An HSBC report said that the stock connect scheme could include other securities such as exchange-traded funds (ETFs). Connectivity with the Shenzhen Stock Exchange could happen next year.

Nikko AM's Mr Tan said that there are market opportunities and anomalies. The A-share market is not an efficient market because the influence of retail investors, who prize smaller, fast-growing companies, outweighs that of institutional investors who prefer larger, more stable ones, he said.

"In a lot of medical companies in China, 40 times (earnings) is considered cheap. In Hong Kong, 40 times is very, very expensive, (it should be) more like 25 times," he said.

But some brand names in the hard alcohol space are trading at mid to high-teens, which he thinks is quite attractive. Some large-cap China car stocks and consumer stocks also trade at a discount to their Hong Kong counterparts, he added.