CLSA issues warning over Stock Connect

A race to sell Hong Kong-listed H-shares and buy China A-shares through the pending Stock Connect scheme when it launches could see the scheme swiftly hit its daily trading quota, said CLSA.

Long-only fund managers are concerned they will lose the premium they paid for exposure to China through H-shares when the scheme launches, said Andy Maynard, the equity broker's global head of trading and execution.

Once the Shanghai-Hong Kong trading link goes live, as is expected in October, that premium is expected to disappear or significantly narrow.

Managers are concerned that if they leave it too late to sell their H-shares and move into A-shares, they will lose the premium, and the opportunity of profiting on the difference in values.

Maynard said clients have asked the firm whether they would risk losing that premium if the daily quota is hit.

A daily quota of Rmb3 billion ($2.1 billion) will be in force for northbound trades – that is, for offshore investors to trade the eligible 568 A-shares on the Shanghai Stock Exchange. Southbound trades – mainland investors trading 266 eligible H-shares – will be subject to a quota of Rmb10.5 billion. The quotas apply only to buy orders. 

Until recently, the only way for investors to buy A-shares in US dollars was through the qualified foreign institutional investor (QFII) scheme, which launched in 2002. Such limited access to the A-share market is the main reason many H-shares have been trading at a premium to their mainland counterparts.

As Beijing is keen to expedite the opening of its capital account, Stock Connect will allow offshore investors direct access to Chinese stocks without applying for a quota. The daily quota will cap capital flow in and out of the country.

Demand through Stock Connect is generally expected to be higher for northbound trades. 

Francis Cheung, head of China-Hong Kong strategy at CLSA, expects A-shares to benefit from extra demand of $8.3 billion if and when MSCI includes them in its global emerging-market indices (but that won't happen until at least next year).

Morever, Cheung said he has not heard of many Chinese fund managers preparing for fund products that will invest in H-shares.

Mainland investors prefer homegrown wealth management products (WMPs) over equity funds. Many such WMPs invest into repackaged loans or entrusted loans extended to private-sector companies.

Cheung forecasts that Stock Connect will be extended to the Shenzhen Stock Exchange within a year of its launch.