Hong Kong-Shanghai share trading opens up

CHINA is opening up of trading in shares in the Shanghai stockmarket to investors based in Hong Kong.

UBS Group Asia-Pacific CEO Chi-Won Yoon. Picture: David Moir

CHINA’S capital markets are set to take another big step forward today, with the opening up of trading in shares in the Shanghai stockmarket to investors based in Hong Kong, according to UBS Asia-­Pacific chief Chi-Won Yoon.

“It’s very exciting,” Mr Yoon said in an interview in Sydney. “Next Monday is the opening day. The start of what is called Mutual Market Access (MMA) will allow investors in Hong Kong to invest directly in Chinese A shares — local shares in China.

“Conversely, investors in China will be able to invest directly in Hong Kong as well. But the interest will be much more northbound — investment from Hong Kong to mainland China.

“It’s a very important step — another major step the Chinese government is taking to open up their capital account.”

Mr Yoon said the opening up of Chinese share trading to foreigners, with trades taking place though the Hong Kong Stock Exchange, had the potential to be larger than the current system of Qualified Foreign Institutional Investment (QFII) quotas, which has already topped $US97 billion ($111bn).

While the trades must be done through Hong Kong, the move means that Hong Kong-based companies such as UBS will be able to buy and sell mainland Chinese shares for their clients around the world.

“Up to now, foreign investors could only buy and sell Chinese shares through QFII schemes,” Mr Yoon said.

“Now foreign investors will be able to invest in mainland Chinese shares like any other market.”

The scheme is starting off with several restrictions. It is limited to trading in a select group of 568 of the larger Chinese shares. The total quota for northbound investment will be limited to 300 billion yuan ($55.8bn).

There will be a daily trading limit of 13 billion yuan.

While initial trading could be cautious, Mr Yoon said the opening up of the Shanghai Stock Exchange could see a major boost in the value of the Chinese sharemarket.

The potential inclusion of top Chinese shares in the MSCI benchmark index of international shares could see a boost in investment of between $10bn and $15bn as foreign investors follow the index recommendations.

Mr Yoon said UBS, which has a significant base in Hong Kong, was well placed to take advantage of the change, given its extensive coverage of mainland Chinese shares.

“We have been building our research franchise in China for the last five to six years. We now cover a universe of more than 300 shares, while most of our peers have only been covering 50 to 100 names,” he said.

“All the investment we have made for this kind of moment we can capitalise on when the market opens.”

Mr Yoon rejected suggestions that the opening up of the Chinese sharemarket to foreign investors could see a drain of investment funds from other regional stockmarkets.

“The overall size of the pie in China is growing in this space,” he said.

He said the opening up of the market could encourage new investment from international hedge funds attempting to arbitrage between the value of Chinese H shares listed on the Hong Kong Stock Exchange and the A shares on the Shanghai Stock Market.

“While they can be the same companies, one is listed in Hong Kong and the other in China. Depending on where it is, it will have a different price,” he said.

“It means that players like hedge funds could go in and try to arbitrage the difference between the two. So it will attract additional market participants and players into the market.”

Mr Yoon said the governance standards for mainland Chinese shares were rising and would continue to improve.

He said it was “just a matter of timing” before the reporting standards of Chinese companies improved.

“I see it as one of our roles, as a capital market player in China, to bring best practice into China and raise the standard of accounting and governance,” he said.

But he said the change would be “a journey”.

“It won’t happen overnight with the opening up of the markets, but you will see these issues surfacing and improving over time,” he said.

UBS is predicting the Chinese economy will record a growth rate of about 7.3 per cent this year.

Mr Yoon said his firm’s view was that the long-term sustainable growth rate of the Chinese economy was 6-7 per cent, a level that some observers argue could be less than is needed to keep unemployment under control.

“The Chinese government is focusing more on the quality of growth than the quantity of growth,” he said.

“It is right for them to do that. The leadership team is working very hard to make sure that the growth policies they have in place are much more sustainable.

“We don’t see a dramatic slowdown in China. We think they will be able to manage through this transition (to an era of slower growth).”

Mr Yoon said the maturing and opening up of the Chinese economy presented more opportunities for Australian companies in areas such as green technology, healthcare and education.

His comments follow the agreement between US President Barack Obama and Chinese President Xi Jinping to co-operate on reducing pollution and greenhouse gases in their economies. “The Chinese leadership have gone so far as to say they are declaring war on pollution. For a country like Australia, which has very well-developed technology in that space, there could be some interesting ­opportunities,” Mr Yoon said. “When the Chinese government put their mind to it, they tend to move rather quickly. They understand the social costs associated with pollution and they take it very seriously.”

Mr Yoon said the Chinese leadership under Xi represented the “new China”.

“It is more confident and it warrants and commands respect on a global stage,” he said. “Equally, the Chinese are beginning to understand the responsibilities that are associated with being a powerful nation.”

He said Xi’s crackdown on corruption was a “necessary step to get China to the next level”.

Mr Yoon said the rising wealth in Asia was creating new business opportunities for UBS in wealth management.

UBS in Asia has hired an additional 200 client advisers this year in Wealth Management, boosting the total to 1100.

He said the rising number of stockmarket listings by Asian companies meant more money for the individuals involved in founding the companies to invest.

Wealth Management has invested assets of 258 billion Swiss francs ($307bn) from clients in the Asia-Pacific. Its total global wealth management business has invested assets of Sfr1.9 trillion.

Mr Yoon said Australia was ideally placed to take advantage of the continued opening up of the Chinese economy.

“Australia is fairly uniquely positioned,” he said. “It is in the most rapidly growing region in the world but it has first world infrastructure and systems, and it has been blessed with rich natural resources. If you had to draw a map of the world and come up with a country that is ideally placed to take advantage of this opportunity, it would be Australia.

“I would look at growth in Asia ex-Japan being a key driver for Australian companies. That story will remain intact for decades.”

Mr Yoon said the outlook in Asia for 2015 was “cautiously optimistic” with an expected regional growth rate of 5.4 per cent.

“It’s still very robust,” he said. “Some of that number will be driven by how well China does.”