China opens stock exchange to foreign money
BEIJING — China's most famous liquor, Maotai, and its top carmaker, SAIC, were among the renminbi draws this week as Chinese authorities launched a much-anticipated cross-border trading scheme that opened Shanghai's stock market to foreign investors via Hong Kong.
The world's second-largest economy is renowned for capital controls aimed at limiting the flow of money into and out of the country, so the Shanghai-Hong Kong Stock Connect pilot program, launched Monday, was hailed as marking a new era of access and allowed Chinese citizens a rare route to international markets.
One week on, the fanfare has died. Trading levels have crashed lower each day, to a fraction of the daily quota of share purchases, and mainland investors have shown a particular lack of interest. The long-promised "through train" of mutual market access has instead proved a "ghost train," according to investment bank CLSA.
Analysts interviewed Friday insist that despite its slow start, the plan represents an important development with huge long-term potential. "It will ultimately be expanded, both in terms of size of flows allowed and the markets it encompasses," said Mark Williams, an Asia economist at the Capital Economics consultancy in London. "If that happens, it will become a very significant part of global financial markets."
The new scheme lets foreign investors with accounts at the Hong Kong stock exchange directly invest in the shares of 568 Chinese companies listed on the Shanghai stock exchange. Thursday's trading reached only 18% of the daily "northbound" quota of $2.1 billion. Previously, only a limited number of foreign institutional investors, approved by Beijing, could trade mainland-listed stocks. Mainland Chinese investors took up an even smaller, and daily shrinking, proportion of the daily "southbound" quota of $1.7 billion of Hong Kong-listed shares.
Southbound flow has been "anemic," but people expected a "huge rush" north, said Fraser Howie, a Singapore-based analyst and veteran watcher of China's stocks. Technical issues including the settlement process kept some investors away, while large investors interested in China probably already have Qualified Foreign Institutional Investor (QFII) funds, a "better facilitator than Connect," he said.
Yet the new plan breaks the mold by opening Chinese markets to investors such as hedge funds that Beijing previously kept out, he said. "It's substantially different from what's gone before. Do they really mean this or is it a mistake?" said Howie, who advises waiting three months to judge the success of the pilot.
The plan's smaller-than-expected impact was "a bit of a surprise," said Liu Ligang, a China economist in Hong Kong for the ANZ bank, who partly blamed the Shanghai bourse's heavy concentration of state-owned enterprises. "Their corporate governance remains opaque, and the attractiveness to foreign investors remains limited."
"This is an important step in portfolio capital liberalization, but going forward, why not do further liberalization and allow foreign investors to raise money in Shanghai directly," Li said. If foreign players could list in Shanghai, "that would create excitement and set an example for Chinese state-owned enterprises and make Shanghai a true international market."
A more likely change, perhaps within two years, could see China's Shenzhen stock exchange start a similar program with Hong Kong. Shenzhen, which borders Hong Kong in south China, has a greater share of "new economy" stocks such as technology companies.
In Shanghai on Monday, the head of the China Securities Regulatory Commission, Xiao Gang, called the Connect platform "conducive to the internationalization of the renminbi." Though Chinese policymakers look to increase the RMB's use outside China, "there are good reasons to think the dollar will remain the pre-eminent global currency," said Williams of Capital Economics.
A poster and leaflets prominently displayed the Connect scheme Friday at a south Beijing outlet of Guotai Junan Securities, one of China's largest brokerages.
Few individuals have bought Hong Kong shares recently, said consultant Bu Kefeng, as they worry about higher commissions and different trading rules, while institutional investors prefer Shanghai stocks.
Customer Tom Yang, 30, who invests in the Shanghai exchange, complained about the $82,000 of capital that mainlanders must have in their brokerage accounts to qualify for the scheme. "I don't have enough money to buy Hong Kong shares, they need $82,000 as the threshold, it's too high for me," said Yang, a wind power consultant. "I wish they could lower it later."
Many Chinese investors interested in Hong Kong stocks already trade there after opening accounts in person on trips to the self-governed Chinese territory. Zhu Ting, 34, a risk manager for real estate firm Beijing Jinyu, sits on some serious paper profit from Tencent, a top Chinese tech firm, after buying its Hong Kong-listed stock last year. Tencent is not listed in mainland China.
The Connect scheme imposes a high threshold for only a limited selection of Hong Kong shares, he said. "If they give us more choice in the future, I may move my account here, but now it's more convenient for me to use the brokerage in Hong Kong," Zhu said. "I hope in the future there are less restrictions in the two systems, so I could earn more from the market."
Some older Chinese investors regret the advance of home investing, and the subsequent loss of community, more than the usually poor performance of Chinese stocks in recent years. "I miss the days around 10 years ago when me and my friends spent the day in the crowded trading halls of brokerages," said Huang Xiulan, 65, as she deposited money in a bank near Guotai Junan.
"None of us knew shares well, but we wouldn't miss any news or rumors, I could spent a whole day there, chatting and drinking tea with old people like me," she said. "Now everybody does it at home with computers. I don't like computers, and I earned little from stocks, so I quit several years ago. Old people like me would rather invest in real estate or buy gold."
Contributing: Sunny Yang