Shenzhen-Hong Kong connect will not unlock MSCI vault
A planned stock market tie-up between Hong Kong and Shenzhen is seen by many market players as key to getting mainland-listed A shares included in the widely-tracked global share indices compiled by MSCI.
But it’s far from guaranteed that a Shenzhen-Hong Kong Stock Connect scheme will sway the benchmark builder’s decision making.
“I don’t think the Shenzhen connect has factored into the MSCI’s timetable, as they focus on the three key hurdles - quota allocation, capital mobility restriction and beneficial ownership,” Michelle Leung, chief executive of Xingtai Capital, said.
In other words, any restrictions that remain for getting into and out of mainland markets will prevent their inclusion.
Leung’s comment reflects the hard truth of China’s strictly controlled quota systems. An exchange link between Shanghai and Hong Kong has provided an alternative investment platform, but the overall usage of the channel by foreign funds has been very modest due to access issues.
Kinger Lau, an equity strategist at Goldman Sachs, believes otherwise.
“The Shenzhen-Hong Kong stock scheme could be up and running in fourth quarter of 2015, a key pre-requisite for A-share inclusion to global indices will be fulfilled and could open a special review by the MSCI,” Lau wrote in a note to clients.
But even Lau acknowledged that most foreign investors can’t access Shenzhen-listed stocks, which account for 41 per cent of A-share market capitalisation unless they are eligible for qualified foreign institutional investors (QFII) or RQFII, which is the renminbi – or yuan-based - version of the dollar-denominated QFII programme.
“One of the major obstacles against the inclusion is that international investors can’t access the Shenzhen stocks in an open and unobstructed manner,” said Lau.
A stock linkup with Shenzhen would be a milestone for the liberalisation of mainland financial markets following the launch of a landmark programme with Shanghai, but problems over accessibility and liquidity are likely to persist.
Large institutional fund managers such as Fidelity and Templeton were among those opposed to the inclusion of A shares by MSCI this year.
Consequently, fund managers have adopted a cautious approach when managing their portfolios, staying away from the liquidity-driven mainland stock markets even though they could easily invest a portion of their funds in a discretionary fashion.
Many major fund managers have mandates that allow them to invest a proportion of total assets in instruments not included in the benchmark against which their performance is measured. That would typically give them scope to add 5-10 per cent of their assets to A shares.
Some US$1.7 trillion is benchmarked against MSCI’s emerging market indexes, data from June 2014 showed. For China, MSCI inclusion could attract an estimated US$400 billion into mainland stock markets.
MSCI said it has formed a working group with the China Securities Regulatory Commission, aiming to spur the further opening of China’s A share market and its inclusion in emerging market benchmarks.
Keith Pogson, a senior partner at EY, said some fund managers are trying to play it down the middle by taking some exposure so that they would not be part of the herd chasing a small number of stocks when the barriers on Chinese markets are finally taken down.
“We would expect that as we head through the year we will probably see more discretionary money being aimed at the A share market to make sure that they are well prepared and similarly avoid the herd moment when A shares are included,” Pogson told the South China Morning Post.
“The Shenzhen Connect would likely have a positive impact in terms of direction of travel, but does not fundamentally change the challenges that led to the outcome this time…accessibility and liquidity,” Pogson said.
