Bigger stock connect quotas will cater to capital flow surge when MSCI includes China, says HSBC

The bank projects that MSCI inclusion will draw US$2b of initial inflows from June 1, before rising to US$24b over time

PUBLISHED : Wednesday, 02 May, 2018, 7:23pm
UPDATED : Thursday, 03 May, 2018, 12:00am

China’s move to quadruple the daily quotas for the stock connect schemes linking mainland and Hong Kong markets is aimed at addressing a potential surge in capital flows when yuan-denominated equities are included in the MSCI index, according to HSBC.

The global stock index provider will include 222 Chinese A shares in its MSCI Emerging Markets Index, using a two-step process beginning on June 1. The inclusion comes amid rising US-China trade tensions that have hurt the performance of Hong Kong and Chinese stock markets in recent months.

“Trade war risks worries are hurting the stock markets in the short term. However, the process of diversifying away from RMB-denominated assets by Chinese investors had just started and should continue for a long time,” said Steven Sun, head of research, HSBC Qianhai Securities.

Starting today, mainland investors are able to trade up to 42 billion yuan (US$6.6 billion) in Hong Kong stocks, up from 10.5 billion yuan previously, while investors in Hong Kong can trade up to 52 billion yuan worth of stocks in Shanghai and Shenzhen, up from 13 billion yuan.

Actual transactions, however, only accounted for about a quarter of the previous daily quota. In April, daily northbound flows into A-shares totalled about 2.7 billion yuan, which represented a sharp increase from the 600 million yuan to 700 million yuan recorded in March.

But Sun estimated that the MSCI inclusion will draw some US$2 billion of inflows from passive and active managers from June 1, before rising to US$24 billion over time.

“Foreign investors’ understanding of China’s regulatory environment will increase and Chinese regulations will also converge with international standards. This will lead to more Chinese stocks being included in the MSCI,” Sun said.

HSBC has forecast the Shanghai Composite Index to end the year up by 12 per cent to 3,500, the Shenzhen Component Index up by 18 per cent to 12,500, and the CSI 300 to reach 4,300, reflecting gains by mid-cap companies.

The bank is also positive about the food and beverage, innovative medicine, IT hardware and online gaming sectors. It is predicting positive outlook for Chongqing Beer, Tonghua Dongbao Pharmaceutical, Jiangsu Hengrui Medicine, Accelink Technologies and online gaming developer Perfect World.

For the more immediate term, Hong Kong’s stocks and Chinese domestic shares are likely to face growing pressure if China and the US, whose trade delegation is in Beijing this week, fail to resolve the dispute through negotiations, or that both sides leave little room for compromise.

Mainland media reported that Chinese President Xi Jinping’s top economic adviser, vice-premier Liu He, will meet the delegation on Thursday and Friday to “exchange views” on issues of mutual concern relating to bilateral trade and business ties. US President Donald Trump has threatened to slap tariffs on up to US$150 billion worth of Chinese goods, in an attempt to force changes in China’s trade practices and to accelerate the opening up of its economy.

Hong Kong and mainland stock markets had also faced headwinds ahead of more interest rate hikes by the US Federal Reserve this year, analysts said, especially given the vulnerability of US equities which have been trading near historically high levels. In addition, Chinese companies’ first-quarter profit growth slowed to 12 per cent, compared with the year-earlier period’s 15 per cent.

“Markets are worried about future inflation caused by high commodity prices. This is strengthening expectation of further interest rate hikes by the Fed,” said Angus To, analyst at Industrial & Commercial Bank of China International.