China's bull run sparks foreign investor scramble

Direct quotas to invest in China have been unexpectedly revived as foreign investors select tried-and-tested ways to ride the equity bull run in Shanghai and Shenzhen.

Bankers and lawyers had expected the introduction of the First Direct market link between mainland China and the outside world, launched six months ago this week to lower interest in using existing systems. In these, investors either apply for their own permission from Beijing - a lengthy process - or pay to use someone else's quota, such as their bank's.

But China's surging stocks have produced a scramble for exposure to the gains, particularly from foreign fund managers who may not be benchmarked to China itself, but risk underperforming if they don't find ways of following the rally and any spillover effects.

In spite of a correction last week, Shanghai has still risen 76 per cent in the past six months while Shenzhen has added 80 per cent. Hong Kong has gained 16 per cent, helped by a recent rally that was supported by record trading volumes.

The Stock Connect's limited range of 300 companies and overseas investors' ongoing issues with ownership of the shares they buy has left many preferring to rely on the use of quotas instead.

"When Stock Connect was about to start, the expectation was there would be less demand for quotas, but we've seen no curtailment yet," Michael Chan, head of BNY Mellon's Asia-Pacific asset servicing business.

China's qualified foreign institutional investor scheme - QFII, pronounced "kew-fie" - has been in place for more than a decade with few significant changes to its structure apart from a gradual increase of total approvals, which were standing at $72bn in late March.

There is also an Rmb330bn ($53bn) RQFII scheme, allowing approved users to use offshore renminbi for onshore investments.

In March, Fidelity was granted a tripling of its QFII quota to $1.2bn, making it the first non-government institution to be approved for more than $1bn - a move seen as a further broadening of the scheme.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

"Stock Connect is being used by banks and mostly new users - hedge funds and smaller asset managers who may not have had access before. That will change as it develops," said Stephane Loiseau, head of Societe Generale's cash equities and execution services business in Asia.

Another issue is the different holidays in Hong Kong and the mainland. These mean the northbound trading link - the pipe through which foreigners buy - is closed on Shanghai holidays as well as Hong Kong ones. It is also closed on the days before a Hong Kong holiday since trades are settled the following day. In total that adds up to 28 days with no access even though six of them are not market holidays in Hong Kong.

"This is one of the big drawbacks and should have been taken care of before Stock Connect opened," said Nicole Yuen, head of greater China equities at Credit Suisse, who also felt the ownership issues should have been cleared up before the link opened.

"We're at the cusp of China opening up and it isn't just about opening the doors, it has to be done right. There's a balance needed between access to China and doing that with the core values of Hong Kong and international markets."

Longer term, however, market participants expect more investors, institutional and other, to use Stock Connect as it expands. A link with the Shenzhen exchange, home to many tech groups and start-ups, is expected later this year.

"People are looking at Stock Connect and going 'well, people are coming in, China is opening up and we need to get in there before the rush'," said Mark Shipman, a partner at Clifford Chance who specialises in structuring investment funds.

The Stock Connect also offers investors the sort of virtually anonymous access to China they get elsewhere - unlike QFII, where approvals mean investors are known and their trading decisions tracked.

Mr Loiseau described China as "a trend, not just a hot topic".

"If you're an investor in Club Med, now you know about Fosun [which bought the French holiday group in February]," he said. "Not every Chinese asset is listed in New York like Alibaba - investors have to come to Hong Kong and China eventually."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation