Major News and Events:
China Announces Cross Border Trading Access: Impact on A:H Discount & Potential Inclusion of Mainland China Equities in Broad Benchmarks
In a ground-breaking decision put forth by China’s Premier Li Keqiang and formally announced by both the China Securities Regulatory Commission (CSRC) and Hong Kong’s Securities and Futures Commission (SFC), investors will finally be allowed to trade between the Shanghai and Hong Kong Stock Exchanges.
This announcement marks the first time that investors in Hong Kong will be able to directly access certain Mainland A shares listed on the Shanghai Exchange and vice versa as Mainland investors will be able to directly access certain Hong Kong listed companies. Previously accessibility was only allowed through China’s investment quota systems.
This is the clearest indication yet of China’s desires to open up its capital markets and is also in keeping with the decision by policy makers in Asia’s largest economy to promote Shanghai as a financial hub. Shanghai inaugurated a free-trade zone in September of 2013 as part of a goal to become a global financial and logistics center by 2020.
• Exact timing and guidelines for trading between the Exchanges should be available within 6 months
• Cross-listed companies (listed on Shanghai and Hong Kong but not fungible) are expected to be included in the new plan.
• Large and mid-cap names will likely also be included. The inclusion of cross-listed companies should be an important step in closing the large discount Mainland (A shares) have traded at in comparison to their Hong Kong (H share) counterparts.
The discount in cross-listed A to H shares has been particularly high amongst financials and insurers. Below are some recent discounts:
This announcement is expected to benefit H share technology/internet companies such as Tencent (KWEB and KFYP’s largest holding, at 10.4% and 17.6% of net assets respectively* as of 4/15/2014) as well as H share Macau casino names as there are limited if any investment options in these sectors for Mainland investors.
Mainland companies that are expected to benefit are those in the China consumer, healthcare and defense sectors. An added consequence of this announcement is apt to impact the composition and weight of China in MSCI indices.
Last month MSCI provided a roadmap for the potential inclusion of mainland Chinese equities in the MSCI Emerging Markets Index. The securities have been excluded due to the inability of foreign investors to access mainland Chinese equities. Only 260 institutions globally can access the mainland