China Improves Market Access for Overseas Investors

Shanny Basar

Shenzhen-Hong Kong Stock Connect is expected to launch in November in the latest move to improve overseas access to Chinese markets and internationalize the renminbi.

Cindy Chen, country head, securities services, Hong Kong at Citi said at an Accessing China seminar at the London Stock Exchange today: “There has been a breakthrough in improving capital mobility in China over the past 12 months.”

She said there were previously no rules concerning companies voluntarily halting trading of their shares on Chinese exchanges. This became an issue when markets  became were very volatile last summer and companies suspended share trading, freezing an estimated 40% of the country’s market value according to Bloomberg. In May both the Shanghai and Shenzhen stock exchanges said would have the right to reject trading-halt applications under extreme market circumstances. In addition suspensions will be limited to a maximum of three months for major asset restructuring and one month during private placements.

In addition in August the Chinese government approved the long-awaited launch of a link between the Hong Kong and Shenzhen stock exchanges following the introduction of Shanghai-Hong Kong Stock Connect in November 2014. The Stock Connect schemes allow any investors to trade mainland Chinese stocks via Hong Kong, and vice versa, without needed a license or an approved quota. The Chinese equity market is important to overseas investors as it is the second largest n the world.

Chen added: “There is no official launch date but Citi is preparing for November 20 for Shenzhen-Hong Kong Stock Connect.”

She continued that shares listed in Shenzhen are typically from the sectors that are likely to boost growth as the Chinese economy moves away from manufacturing such as technology, consumer and healthcare. Shenzhen’s Chinext market is seen as the equivalent of Nasdaq in the US.

Chen said that after the launch of Shenzhen-Hong Kong Stock Connect, exchange-traded funds listed on both Chinese exchanges could be included in the scheme next year. “Then IPOs through IPO Connect, followed by listed bonds and the interbank bond market,” she continued.

In February this year Chinese regulators announced they would make it easier for overseas investors to access the $7.4 trillion China interbank bond market (CIBM), the third largest in the world after the US and Japan. Chen said: “A breakthrough this year has been the opening of the CIBM market.”

In addition, from next month the renminbi will be included in the IMF’s Special Drawing Rights (SDR) reserve currency basket.

To coincide with this development, Clearstream Banking said in a statement today that the central security depository’s customers can settle and safe keep China securities listed in CIBM via Clearstream Banking’s China Bond Link from October 17.

Clearstream said in a statement: “Today’s announcement will help open up China’s bond market for foreign investors and provide further strength to the government’s aim to establish the renminbi as an international currency and to liberalise its financial market.”

Chen said: “Options for accessing China are far better than 12 months ago.”

Sudir Radu, managing director of exchange-traded products at FTSE Russell said at the seminar that the London Stock Exchange Group’s index provider will announce a decision next week on whether China will be included in FTSE’s standard global benchmarks. The China A-share market has been on the FTSE Watch List for potential inclusion in secondary emerging since 2005 but failed two tests out of the nine tests in the last annual view in September 2015.

In May last year FTSE Russell announced the launch of two emerging markets indices in which A shares had a 5% weighting to allow investors to transition to the eventual inclusion of China in global indexes.

In March this year FTSE Russell announced the creation of a new index, the FTSE China A-H 50 Index, which is the first FTSE Russell index to represent the largest companies listed in mainland China (A Shares) and/or Hong Kong (H Shares). The index has been licensed by Deutsche Bank for ETFs listed in London and Deutsche Börse.

Radu said: “Total international take-up of China A-shares is currently only between 2% and 3%.”

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