Do you know what ‘Maotai’ is?
It is a traditional spirit alcohol in China. It’s what people give each other as gifts on special occasions. It is a ‘must-have’, when you want to get things done, you give Maotai as a gift.
However, the current crackdown on corruption has brought pain to Maotai producers. The act of giving expensive gifts — such as Maotai — can now get local government officials in trouble.
You may be thinking, ‘Why is he telling me this? Why is this relevant to me?’
Here’s why:
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‘There are more than 500 pure A-share stocks that are open for the first time with a total market cap close to $US1 trillion ($1.1 trillion), according to HSBC. Mainland Chinese investors will have access to over 200 pure Hong Kong stocks with a total market cap of more than $US2 trillion.’
The Australian Financial Review
What is the Australian Financial Review talking about here?
‘The launch date for the Shanghai-Hong Kong Stock Connect is set for November 17, the Hong Kong Exchanges and Clearing (HKEx) said on Monday, clearing uncertainty over the start of the highly anticipated cross-border trading link.’
CNBC
Now you understand why I was telling you about Maotai…because you will soon be able to invest into the A-shares in China directly.
A-shares include most of the Chinese mainland stocks, and are currently off-limits to foreign investors.
In New Frontier Investor I’ve had to forgo a lot of good opportunities in the previous few months, because I could not recommend something my subscribers could not invest in.
But with the ‘through-train’, that’s about to change.
The Shanghai Stock Exchange had a market capitalisation of RMB 15,116.53 billion in 2013. Using an exchange rate of one Aussie dollar to six RMB yuan, this was a market cap of AU$2.5 trillion.
The through-train will open US$1.1 trillion of A-shares to foreign investors. While that does not represent everything, it is still quite sizeable.
And don’t forget about Shenzhen Stock Exchange. That is where the small-caps, medium-caps and the startup sectors are traded.
And, as readers of New Frontier Investor already know, the small-caps, medium-caps and the startup listings in China outperform large-caps. You really need to get involved there eventually.
Port Phillip Publishing ahead of the curve
‘You’ll see more and more interest from institutional investors here in Australia as the access becomes easier.’
HSBC’s head of global asset management in Australia, Geoff Pidgeon
That’s not news to us at Port Phillip Publishing. It’s one of the reasons we launched a new investment service earlier this year focussing solely on emerging opportunities in what we call ‘new frontiers’.
But, despite what Geoff says in the above quote, it’s not just institutional investors turning towards China. Ultimately retail investors like you and me are showing interest in the second largest economy in the world.
Left – The Bull, Wai Tan Shanghai; Middle – Tourists facing Pudong Shanghai; Right – Example securities companies on the A-shares
The first stocks you need to have on your ‘buy’ list are the securities businesses. The new connectivity will be huge for the securities sector.
The daily turnover contribution may hit RMB 17 billion with the ‘through-train’. That will mean an earnings growth of 5–13% for various Hong Kong listed brokers.
Don’t let your mind stop there. This is about opening up the entire Chinese equity market, and the entire Chinese capital market.
It means Shenzhen, it means bonds, and it means derivatives.
It also means financial product innovation and more offerings from the brokers.
Yes, you need to be long the securities sector.
The rules
For overseas investors like you and me, there are ownership caps. A single foreign investor cannot hold more than 10% of a company listed on a mainland exchange. The maximum combined holdings of all foreign investors in a mainland listed firm will be 30%.
This excludes the so-called ‘strategic investors’, typically describing long term investors who are subject to lock-up periods.
And you cannot short-sell.
It is a shame that you cannot short-sell, particularly if you want to short certain sectors or companies, but this may change in the future.
I have already mentioned institutional money; they will have more influence on the mainland market going forward.
Retail investors dominate the mainland market, and new institutional money will start to alter the trading patterns in Shanghai.
Other Implications
The MSCI will review the position of Asia in its indices. This will have a profound impact on how global funds allocate their capital.
Funds will allocate more capital to Asia as it will take up a bigger share due to the opening of China’s capital market. This will make Asia an even bigger capital market, deserving of attention.
Ultimately, this helps China to let its capital ‘escape’.
For the rich, it is great way to channel money out of China. That is something they are desperate to do.
The reason why Chinese asset markets, including real estate, have seen one bubble after another is because of a lack of investable asset classes.
The opening of China’s capital market lets capital out, allows diversification, eases inflationary pressure and eases the pressure on the RMB.
Learning Chinese characters
Is the ‘through-train’ huge? Yes it is. But it is only the beginning of a massive capital market reform that will likely shake the foundation of global capital flow.
Do you need to learn Chinese characters?
It would be very helpful if you do. But it’s not easy. And I do expect there will be more English reporting and more English information flow on China’s assets to match the increased trading opportunities.
Vern Gowdie,
Editor, Gowdie Family Wealth
From the Port Phillip Publishing Library
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