With the Hong Kong-Shanghai Stock Connect set to launch in mid-October, offshore investors have swarmed into a number of Hong Kong-listed exchange traded funds that invest in a portfolio of A-shares.
The first week of this month has seen more than 2 billion Hong Kong dollars flowing into several A-shares ETFs - funds listed on the Hong Kong Stock Exchange and use offshore renminbi to invest in shares traded at the Shanghai Stock Exchange, Shanghai Securities News reports.
Zhang Xiaojun, spokesperson with the China Securities Regulatory Commission, said on Friday that the stock connect scheme will do a test run on Oct. 13.
Interest in shares traded on the Chinese mainland bourse continues to ratchet up as many A-shares ETFs are now traded at a premium to the value of underlying shares they invest in.
Some Chinese companies listed in both Shanghai and Hong Kong stock markets have a price difference. A-shares ETFs have provided an opportunity for investors to take advantage of some duo-listed firms whose shares in Shanghai traded at a discount to those in Hong Kong.
The Hang Seng China AH Premium Index, an index tracking the average price difference for duo-listed Chinese companies in the Shanghai and Hong Kong bourses, has been trading bellow 100, indicating that duo-listed firms' shares on average are still traded cheaper in Shanghai.
However, HSBC said in a recent research report that the price difference between A and H shares are expected to gradually close after the Shanghai-Hong Kong Stock Connect scheme is launched.
In addition to A-shares with price discount to the listed firm's H-shares, companies with lower valuation than comparable firms, those with high dividend or with dominant market shares will be favored by offshore investors, said Chen Li, chief China equity strategist at UBS Securities.
Besides, sector players that are scarce in the other market will also have potential to outperform, and many analysts have identified beverages, especially liquor, auto and defense stocks as popular choices among northbound investors, or offshore investors buying A-shares in the upcoming stock connect scheme.
The scheme to allow oversea investors to gain direct exposure to China's capital market has also rekindled confidence among retail investors on the Chinese mainland. Many expected the scheme could end the bearish performance of the Chinese stock market over the years.
The Shanghai Stock Exchange has rose more than 13 percent to close at 2,331.95 points on Friday since the second half of this year. Meanwhile, data from China Securities Depository and Clearing Corp. Ltd. shows that more than 170,000 A-share accounts have been opened during the week that ended August 24, and new account opening has hovered around 160,000 each week since then, a sign that retail investors on the Chinese mainland are making a comeback in the stock market, ready to pick up the slack.
Once the scheme is launched, it will draw more investment by institutional investor from offshore. HSBC estimates that the scheme will beef up institutional investors' presence in the mainland stock market to at least 10 percent of the A-share market, or 1 trillion U.S. dollars, by 2020.
Growing participation by offshore investors in the A-share market will also increase the representation of Chinese stock in global portfolio and thus help China make a stronger case in the accession to global benchmark indices such as the MSCI, the HSBC report said.