Departing now: the through-train to Shanghai-Hong Kong Stock Connect

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The 17 November start of Shanghai-Hong Kong Stock Connect, known as the through-train to equity investing in China, holds numerous opportunities for early adopters.


Shanghai-Hong Kong Stock Connect, also coined the through-train, allows mutual access between the stock exchanges in Shanghai and Hong Kong, marking a major milestone in the reform of China’s financial markets including accelerated renminbi (RMB) and financial market liberalisation.

China, as the world’s second-largest economy with a share of over 12.3% of global GDP, accounts for 10.5% of the world equity market capitalisation – second behind only the New York Stock Exchange. Yet, China’s weight in the MSCI AC World index is a mere 2.2% and it is estimated that global mutual funds have less than a 2% allocation in China. Clearly, global investors are underweight China relative to its global economic influence. Arguably, Stock Connect can be the catalyst for a re-rating.

graph 1

Source: Bloomberg, MSCI,  CEIC, SSE, HKeX, Goldman Sachs Research, September 2014


Perhaps surprisingly, China’s capital market was only established 30 years ago, with the first public company formed in 1984. And it was only a decade ago that Chinese investments became accessible to international investors, with the first batch of the Qualified Foreign Institutional Investor (click here to find out more about QFII’s) scheme approved in 2003.

Over recent years, China has accelerated the opening-up of its capital markets to international investors with the scaling of approvals for QFII quotas, and with the introduction of the Renminbi Qualified Foreign Institutional Investor (click here to find out more about RQFII’s) scheme.

Currently, international investors can only access onshore China investments via the QFII or RQFII schemes. Outward investments by domestic Chinese investors have to be channelled via Qualified Domestic Institutional Investors (click here to find out more abuout QDII) programmes.

All three programmes are for institutional investors only and come with restrictions such as quota caps, lock-up periods, fund repatriation restrictions, asset allocation rules, etc.

With Stock Connect, onshore mainland investors and international investors can bypass any QFII/RQFII/QDII restrictions and directly access Hong Kong and Shanghai-listed shares without pre-approved licenses and quotas. The programme is essentially open to institutional and retail investors (mainland Chinese investors must maintain a minimum trading account balance of RMB 500 000).

The result is the second-largest global equities market by market cap (USD 6.7 trillion). For international investors, USD 4 trillion of market cap will be added to the investable universe.


For global and emerging market investors, participation in Stock Connect is, in our opinion, a ‘must’ since it provides a new framework for investing in China.

Both MSCI and FTSE will revisit the A-share decision in their next annual review, and we believe the Stock Connect program may be the solution that will drive a favorable outcome. Stock Connect scheme will make China A-shares easily accessible to international investors, thus removing the key concerns highlighted by MSCI and FTSE Group. China A-shares inclusion in global equity benchmarks will force a major re-weighting of global/EM portfolios.

Full inclusion of A-shares into MSCI EM would raise China’s country weighting from 19% of the benchmark to 28%. Similarly, the FTSE Group estimates that the combined onshore and offshore listed Chinese equities will have a weighting of around one third of the FTSE Emerging index.

graph 2Source: MSCI, March 2014. Assumes 100% inclusion factor applied to the freefloat-adjusted market capitalisation of China A-shares constituents in the pro forma MSCI China Index. China A-share securities are subject to a foreign ownership limit of 30%. Data as of 18 Oct, 2013, based on the pro forma results of November 2013 SAIR.

Until the eligible Stock Connect investable universe is completely expanded, and until the Northbound daily and aggregate quota caps are significantly relaxed, QFII and RQFII remain relevant for investors in Chinese equities. However, over time, it’s inevitable that these schemes will end.

For the Shanghai-Hong Kong Stock Connect through-train to equity investing in China, it is all aboard!

Also, click here to see our 27/10/2014 post ‘The train approaching platform A and H’

Hue Lu

Senior Investment Specialist, Asia Pacific and Greater China equities

One thought on “Departing now: the through-train to Shanghai-Hong Kong Stock Connect”

  1. The Northbound (A-shares) daily quota was depleted by 2pm Hong Kong time on the first trading day of Stock Connect. Volume has been disappointing since, but we believe it’s because most long funds have not yet joined this train (regulatory approvals have not yet been cleared for funds registered in the US and Europe).

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