Investing in China Yes, Investing in China Not

The “investing in China” story was the hottest scheme since the beginning of this century. But for those who have bought so called China equity fund before, do you know that you never really invested in the real China stock market?

china-stockmarketIn the past, foreigners were not allowed to invest in Mainland’s securities markets, the Shanghai stock exchange (the “A” shares). A lot of funds merely invest indirectly in Hong Kong stock market (the “H” shares) and call themselves China fund.

For those who have bought so called China ETF, do you know that you merely purchased a “synthetic product”, which invests in derivatives such as swaps, futures, and packaged by financial institutions into ETFs. (OMG..)

Traditional ways to gain exposure to China onshore market

There were only 3 ways to gain exposure to Shanghai stock market if you are a foreign investor (from China’s point of view)

  • Qualified Foreign Institutional Investor (QFII) scheme – since 2002
  • Renminbi Qualified Foreign Institutional Investor (RQFII) scheme – since 2011
  • Synthetic ETF

Now everything has changed with the new Shanghai-Hong Kong Stock Connect debuted on Monday.

What is Shanghai-Hong Kong Stock Connect?

This is a new cross border investment channel, which will allow investors in Hong Kong and mainland China to trade eligible shares in each other’s market through approved local securities firms or brokers and securities trading service companies. (OK, I know… forget about the definition.)

Why is this news important to you?

In 2011, I blogged “Yuan Will Be Fully Convertible by 2015“. Now it is already 2014, this connect is an important step within Beijing’s overall master plan to accelerate RMB’s internationalisation and financial market liberalisation. Here is what is going to happen:

  1. Massive flows are expected to be invested in China, and large flows from mainland Chinese investors may access Hong-Kong.
  2. Both MSCI and FTSE (the world’s largest stock market indices providers) will need to revisit the A-share decision in their next annual review
  3. China A-shares inclusion in global equity benchmarks will force a major re-weighting of global and Emerging market portfolios.

In layman’s term, there could be huge inflow of money to China’s stock market simply because of the demand of purchasing China stocks. (This does not mean the China’s economy is better or whatsoever)

At the same time, the Chinese shares are attractively valued. The current price is below their 5-years historical average, while H shares are trading at 41% discount and A-shares at 33% a discount.

In my chart of the week last week, I showed you the chart of tumbling commodity prices. How many times have you heard the news that China’s slowing down is the root cause of softening of commodity prices.

I always like to use the main stream news as a contrarian indicator. Take a look at the chart below.


This will be an interesting observation especially at a time with all the protests in Hong Kong. Is China’s stock market slowing down or shooting to the sky? What do you think?

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