Game change in Hong Kong and Shanghai

3 September 2014

Seventeen years after Hong Kong’s “return” to China, we are about to witness another momentous watershed for these two economies. The Shanghai-Hong Kong Stock Connect is slated to take effect on October 13, “a bilateral program giving investors holding accounts with Hong Kong brokers access to stocks listed on the Shanghai market and Chinese investors access to the Hong Kong market”. Kairos analyst Moreno Tatangelo, based in London, explains the details and outlook of this groundbreaking new program.

“It will initially be limited to 266 stocks listed on the Hong Kong market and 568 on the Shanghai market, corresponding to 82% and 90% of each market’s capitalization, respectively. In addition, in terms of size, the program will limit net daily outflows from China to RMB 10.5 billion (a total of RMB 250 billion) and inflows to RMB 13 billion (a total of RMB 250 billion)”.

This will lead to a dramatic transformation in international players’ MO in China, as they will now, for the first time, be able to invest without time limits or the need for amounts available only to institutional players. Tatangelo predicts that in the long term the program will improve the efficiency of domestic trading, currently dominated by local retail investors, and that this will trigger a significant rerating.

It is no coincidence that Tatangelo and other members of the Kairos team have met in recent weeks with about thirty managers based in Hong Kong and Shanghai, enabling them to identify the best opportunities available in this context.

“Let’s not overlook how the Chinese authorities’ announcement of their plans to gradually open their capital market leads to expectations that the program could be expanded after a more or less lengthy initial trial period”. Tatangelo concludes that “this would be a fundamental milestone for the world’s sixth and seventh largest markets”.