Investors can now directly tap-in to China's growth story, albeit rather belatedly. This week China's A-share stock market was opened up to foreign investors through the Shanghai-Hong Kong Stock Connect initiative. The pilot scheme will give international investors access to around 850 equity lines on the two linked exchanges, which hitherto had been the preserve of a handful of select investors.
It's not just overseas investors getting in on the act; the initiative also clears the way for mainland residents in China to trade shares in Hong Kong for the first time. Proponents of the scheme envisage that it will help to drive liquidity flows in and out of mainland China, while opening up a $4.2 trillion capital pool to the outside world. Premier Li Keqiang believes the move will strengthen the two cities' status as global financial centres, but it also sends out a clear message that China is opening up to inward direct investment. And in a separate move, partly initiated to help drive China's internal consumer market, Hong Kong authorities got rid of a daily cap on how much renminbi locals can buy, helping to deepen the pool of currency outside the mainland.
Though the Shanghai-Hong Kong tie-up may eventually come to be seen as a definitive step towards the liberalisation of China's financial markets, for now foreign investors will be allowed to trade only a small proportion (a daily $2.1bn limit) of the Shanghai stock exchange market capitalisation. Nonetheless, City institutions have been expanding their Asian research and execution teams in anticipation of the Stock Connect initiative, which probably indicates that 'managed money' believes that the trading restriction in place will be relaxed or rescinded over time. The good news is that just prior to the introduction of Stock Connect, China's Ministry of Finance said that international investors would be exempt from capital gains tax.
