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China Opens Doors to Foreign Investment in Stocks [National News Agency (Lebanon)]
[November 11, 2014]

China Opens Doors to Foreign Investment in Stocks [National News Agency (Lebanon)]


(National News Agency (Lebanon) Via Acquire Media NewsEdge) One of the world's biggest stock markets, Shanghai, will open up to foreign investors next week and grant access to shares of hundreds of Chinese companies that stand to benefit from Beijing's reforms—from auto manufacturers to tour group operators.



A trading link between Hong Kong and Shanghai will start Nov. 17, allowing global funds to buy into a pool of stocks on the mainland worth an estimated $2 trillion. It is one of China's biggest efforts to open up its tightly-controlled financial markets. Chinese shares have been poor performers since the global financial crisis, but with billions in dollars set to pour in, investors are betting that could turn around.

"Hong Kong stands at the forefront of the largest capital account opening of a country since [World War II]," U.S.-based broker Jefferies said in a note to clients. "The market should take the news positively given some of the recent political issues and fears that the program had stalled." The highly-anticipated program opens up a number of stocks to foreign investment for the first time, many of which are expected to benefit from the rebalancing of China's economy from manufacturing toward consumer spending. These include automarker SAIC Motor Corp . , China International Travel Services , a travel operator which runs the only nationwide duty-free operator, and Kweichow Moutai , a state-run company which is the biggest producer of Chinese baijiu liquor.


Stocks jumped Monday in response to the news, with Hong Kong up as much as 2.4% and Shanghai up 2.3%. Since the program was announced over 6 months ago, Hong Kong has gained 3.9% and the Shanghai Composite is up 17.5%, making it one of the world's top performing major benchmarks this year as investors anticipated a flood of cash flowing in.

Underscoring the political importance of the trading link, Chinese President Xi Jinping told Hong Kong's leader yesterday it would come soon. Final approval was given by Chinese regulators early Monday, hours before U.S. President Barack Obama landed in Beijing.

Before the program, handpicked fund managers had been able to invest in Chinese markets through a quota system capped at a total of $105 billion. The Shanghai-Hong Kong Stock Connect program though will allow all types of investors to buy shares on the Shanghai Stock Exchange, while also letting wealthy investors in mainland China to buy stocks listed in Hong Kong.

For global investors, the attractions are plenty. While they can currently get access to Chinese shares listed in Hong Kong, most of those are debt-laden state-owned enterprises that offer limited appeal.

With the trading link, they'll be able to buy a further 568 Chinese shares in sectors like health care, industrial materials and consumer staples. Investors may find "scarcity value" in a number of Chinese shares that aren't dual listed in Hong Kong or elsewhere and that typically couple high returns on equity with low debt loads, according to UBS .

"There are certain sectors which, as an investor, you want to de-emphasize, such as heavy industry," said Adrian Mowat, chief emerging market and Asian equity strategist at J.P. Morgan Chase Co. Stocks tied to China's economic rebalancing, such as consumer goods, were in "limited" supply on Hong Kong's market, he said.

From the perspective of mainland investors looking to invest in the Hong Kong market, sectors such as the telecoms sector—not listed in the A-share market—were a big draw, he said.

That has made telecoms stocks listed in Hong Kong among the best performers this year, up 28.7% since Stock Connect was first announced. China Mobile, the world's biggest mobile operator, has soared 30.9%, while China Telecom has leapt 37.7% in that time.

One widely-used strategy is betting on pricing differentials between stocks dual-listed in Shanghai and Hong Kong to converge, as international prices become more closely linked to their mainland equivalents.

The average spread between Hong Kong and Shanghai-listed equities has narrowed 7% since the program was first announced, with underperformance following the start of widespread street protests in Hong Kong in late September helping Shanghai's stocks narrow the gap throughout October.

Many banks expect the scheme will be soon expanded to the Shenzhen Stock Exchange, which combined with Shanghai and Hong Kong would form the biggest stock market in the world outside of the U.S.

To be sure, there are plenty of worries. Accounting scandals continue to plague Chinese companies—a report into alleged fraud at Tianhe Chemicals by hacktivist group Anonymous Analytics in September led to a month-long suspension for its shares, which have since fallen 36.4%.

The flows into China, and vice versa, will have limits, however. The scheme limits investment into Shanghai to a daily $2.1 billion, that is capped at $49 billion. The quotas are designed to prevent destabilizing impacts on China's capital account, but brokers also warn that they could create difficulties for large investors seeking to make orders during the initial days of trading.

Even afterward, the quota could still be exhausted quickly if large numbers of buyers seek to enter.

Investors will find other limitations, too. Orders of Chinese stocks will have to place their order to buy or sell before the trading day starts to meet the requirements of Shanghai's exchange, limiting their ability to react quickly to market moving events like corporate earnings.

Speaking at a news conference on Monday, Charles Li, the chief executive of Hong Kong Exchanges and Clearing, said he was confident the link was going to work. "There may be glitches along the way," he said. "When they do arise we'll fix them," he added, saying the program was one-of-a-kind and investors should have patience.

(c) 2014 NNA LEBANON Provided by SyndiGate Media Inc. (Syndigate.info).

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