Major News and Events:
China Announces Cross Border Trading Access: Impact on A:H Discount & Potential Inclusion of Mainland China Equities in Broad Benchmarks
In a ground-breaking decision put forth by China’s Premier Li Keqiang and formally announced by both the China Securities Regulatory Commission (CSRC) and Hong Kong’s Securities and Futures Commission (SFC), investors will finally be allowed to trade between the Shanghai and Hong Kong Stock Exchanges.
This announcement marks the first time that investors in Hong Kong will be able to directly access certain Mainland A shares listed on the Shanghai Exchange and vice versa as Mainland investors will be able to directly access certain Hong Kong listed companies. Previously accessibility was only allowed through China’s investment quota systems.
This is the clearest indication yet of China’s desires to open up its capital markets and is also in keeping with the decision by policy makers in Asia’s largest economy to promote Shanghai as a financial hub. Shanghai inaugurated a free-trade zone in September of 2013 as part of a goal to become a global financial and logistics center by 2020.
• Exact timing and guidelines for trading between the Exchanges should be available within 6 months
• Cross-listed companies (listed on Shanghai and Hong Kong but not fungible) are expected to be included in the new plan.
• Large and mid-cap names will likely also be included. The inclusion of cross-listed companies should be an important step in closing the large discount Mainland (A shares) have traded at in comparison to their Hong Kong (H share) counterparts.
The discount in cross-listed A to H shares has been particularly high amongst financials and insurers. Below are some recent discounts:
This announcement is expected to benefit H share technology/internet companies such as Tencent (KWEB and KFYP’s largest holding, at 10.4% and 17.6% of net assets respectively* as of 4/15/2014) as well as H share Macau casino names as there are limited if any investment options in these sectors for Mainland investors.
Mainland companies that are expected to benefit are those in the China consumer, healthcare and defense sectors. An added consequence of this announcement is apt to impact the composition and weight of China in MSCI indices.
Last month MSCI provided a roadmap for the potential inclusion of mainland Chinese equities in the MSCI Emerging Markets Index. The securities have been excluded due to the inability of foreign investors to access mainland Chinese equities. Only 260 institutions globally can access the mainland
markets via the Qualified Foreign Institutional Investor program (QFII). The Chinese government began a program called Remnimbi QFII which allowed Chinese asset managers to list mainland exposure ETFs in Hong Kong. The KraneShares Bosera MSCI China A (ticker KBA) utilizes RQFII to gain access to the mainland equities. We believe this announcement allows MSCI to begin inclusion of mainland Chinese equities as it does not require having QFII nor RQFII. Full inclusion of mainland Chinese equities should raise China’s current 17% weight to 27% due to the additional 10% allocation to MSCI China A within MSCI Emerging Markets. While MSCI will announce in June their decision regarding mainland equity inclusion, we believe they will proceed based on this recent development on mainland access.
Finally this announcement is a significant step forward, however there are still a number of large cap Chinese companies particularly in the technology space that are listed in the US and are therefore not eligible to be included in any broad China indices. KFYP and KWEB offer an alternative by providing access to both US and Hong Kong listed companies.
Pew Study: China is the Global Leader in Renewables Investments
For the second year, the annual Pew Charitable Trusts report titled, “Who’s Winning the Clean Energy Race?,” shows that China is the world leader in clean energy investment, with $54 billion in investments in renewables in 2013, well above total U.S. investment of $36.7 billion according to Bloomberg.
The Pew report cited China’s efforts to reduce poverty, increase domestic economic development and solve its air pollution problems as key drivers leading the country to invest heavily in clean energy. Though renewables market share is on the rise globally, the report said that overall worldwide renewables investment has been declining for two straight years. Investments totaled $254 billion last year, a decline of 11 percent from 2012 and 20 percent from 2011 when investments peaked at $318 billion.
China installed 14 gigawatts of electricity generation capacity from wind farms and 12 gigawatts of solar power generating capacity last year, whereas the U.S., which has seen a boom in domestic shale gas, installed less than 1 gigawatt of wind power after a tax incentive for the wind industry expired. The U.S. installed a record 4.3 gigawatts of solar generation capacity in 2013 according to the report.