Stock Connect provides new opportunities

Updated: 2014-11-18 13:12

By Paul Welizkin in New York(China Daily USA)

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Stock Connect provides new opportunities

Hong Kong Exchanges and Clearing Ltd Chairman Chow Chungkong (second left) and HK Chief Executive Leung Chunying prepare to hit a gong during the launch ceremony of the ShanghaiHong Kong Stock Connect in Hong Kong on Monday. Roy Liu / China Daily

The Shanghai-Hong Kong Stock Connect program that started on Monday gives international investors both opportunities and risks, say money-management professionals.

The program offers foreigners access to the over 500 stocks listed on the Shanghai exchange for the first time. Eligible Chinese domestic institutional investors can trade certain stocks on the Hong Kong Stock Exchange.

"The onshore markets offer investors inexpensive valuations and low correlations to global equity indices," Brendon Ahern, managing director of KraneShares, a provider of China-focused exchange-traded funds (ETFs), said in an email to China Daily. "We believe the reforms and continued access for global investors allows for educated investors to make prudent investment decisions."

Investing directly into Chinese companies would expose US investors to risks associated with weak corporate governance and limited disclosure of information due to language and time differences, Jack Liu, senior vice-president at Chardan Capital Markets in New York, said in an email. But he added that "it should not be perceived any more risky from investing in China through the old structure."

"In addition, the China market has a 10 percent cap (in) both directions for daily stock price movement. That could help investors avoid a drastic loss within a short period of time," said Liu.

Stock Connect provides new opportunities

He said an ETF that specializes in China may be an ideal way for individual investors to get started. "(A) China-focused ETF not only is a great starting point for individuals, but I also believe it will be a dominant channel for most foreign individuals to invest in Chinese stocks."

Initially, Stock Connect imposes daily trading caps based on the overall net buys and sells and limits on the aggregate size of the program. "We believe these restrictions will be loosened over time," said a research note from Frank Yao, senior portfolio manager at New York-based Neuberger Berman, who also believes that "foreign institutional investors will have more meaningful access to this sizeable market."

Institutional investors are apt to take advantage of Connect due to their familiarity with the onshore markets and ability to leverage their internal and external research, said Liu.

"Sophisticated US fund managers will be able to effectively navigate local regulatory environment and identify potential flags better and quicker than an individual. In addition to their rigorous risk/reward assessment, their expertise could also help overcome challenges as a result of differences in culture, language, or even a time zone. Being a US-based fund will also add an additional protection and trust layer for US-based investors."

Ahern believes that Stock Connect may also have an effect on the way Chinese stocks are represented in market benchmarks that are found in many investor portfolios.

"All investors should be aware of Connect's potential for index providers to include onshore equities in their global benchmarks which have previously been excluded. If full inclusion of onshore equities were to take place, MSCI Emerging Market's current 20 percent weight to China would rise to 30 percent," he said.

Stock Connect is expected to boost demand for the renminbi (RMB) in Hong Kong and, as a result, the size and influence of the offshore market. "It helps to institutionalize the onshore equity markets which is nearly 80 percent owned by Chinese individual investors in addition to providing greater access to the renminbi. (We believe that) both the onshore equity markets and the renminbi are under held globally," said Ahern.