China’s financial liberalisation steps open more investment opportunities
Jade Fu, Investment Manager at Heartwood Investment Management, comments on the Shanghai-Hong Kong connect programme.
Chinese authorities announced a major change this week to allow foreign investors access to China’s onshore (A-share) market. Through the Shanghai-Hong Kong connect programme, foreign investors now have access to 568 onshore listed companies through selected Hong Kong brokers; hitherto, international investors’ access to China’s onshore market was extremely limited. This will help to create a more liquid, deeper and broader equity market.
We believe that these developments open tremendous opportunities, offering investors more choice and diversity. Compared with Hong Kong, which has a market weight of 80% in financial and energy companies, Shanghai has a larger share of domestically-exposed sectors, including Consumer Discretionary, Healthcare and IT. Investing in these sectors should help investors gain exposure to China’s long-term domestic demand story, as the economy rebalances away from an externally-led growth model.
Of course, this is only the first step towards financial market liberalisation, the onshore market will continue to have controls, although looser, and there are still a lot of hurdles to overcome. However, longer term, we expect these developments will change the way investors think about the Chinese stock market as it becomes more integrated into the global financial system; it is expected that China’s onshore market will become part of the MSCI Emerging Markets Index over the next couple of years. Growing international recognition should spur significant structural demand from long-term, institutional investors, who are likely to increasingly view China as a core holding.
Nonetheless, we should note that China’s regulatory framework is still maturing and there can be corporate governance challenges when investing. In addition, valuations do not always reflect corporate fundamentals, and stocks often trade on sentiment due to the mainly retail investor base. Therefore, selectivity and fundamental bottom-up research is essential when investing in this market.
Our client portfolios have exposure to China through a greater China equity fund (which includes both Hong Kong and mainland China stocks), and a broader Asia equity fund. As such we already have exposure to the A share market which may benefit from this change. However we will continue to monitor this rapidly changing market closely to search for potential opportunities and may add to positions where fundamentals and valuations are supportive.