Exchange traded funds holding Chinese A-shares stocks, the equities trading in Shanghai and Shenzhen, could continue their recent upside Monday after regulators finally set a launch date for the widely anticipated Shanghai-Hong Kong Stock Connect.
The Shanghai-Hong Kong Stock Connect, the program aimed at increasing securities trading between Hong Kong and mainland China, was previously scheduled to launch last month but will instead debut on November 17. [Allure of A-Shares ETF Rises]
Once the Shanghai-Hong Kong Connect launches, foreign investors will be able to account for nearly a quarter of daily trading, a catalyst that buoyed demand for soaring A-shares ETFs. News of the Nov. 17 launch date sent Chinese stocks soaring during Monday’s Asian session with financial services names leading the way on the mainland.
The Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR), the largest U.S.-listed A-shares ETF, allocates over 41% of its weight to the financial services sector while the the KraneShares Bosera MSCI China A-Shares ETF (NYSEArca: KBA) features a 36.3% weight to that sector. The Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK) allocates 35.3% of its weight to financials.
Over the past 90 days, those ETFs are up an average of 7.2% while the iShares China Large-Cap ETF (NYSEArca: FXI) has traded lower.
“The exchange connect expands access to Chinese markets from a limited number of qualified institutions to anyone with a Hong Kong brokerage account. The $64 billion Qualified Foreign Institutional Investor program has allowed overseas money managers to buy local securities since 2002, while a similar program using offshore yuan began in 2011,” according to Bloomberg.
Due to restrictions on foreign ownership of A-shares, China is far behind other large markets, both developed and emerging, in terms of foreign ownership of its equities. Even including Chinese stocks listed in Hong Kong or New York, foreign ownership of Chinese stocks was just 11.4% at the end of 2012, half the level seen in Japan and barely more than 20% of foreign ownership of German stocks.
In late September, Chinese regulators expanded the renminbi qualified foreign institutional investor (RQFII) that allows foreign investors access to stocks traded on China’s mainland after ASHR and the Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF (NYSEArca: ASHS) were forced to limit creations because robust demand forced the ETFs to bump up against their RQFII limits. [RQFII Expansion Helps A-Shars ETFs]
The Hong Kong, Shanghai and Shenzhen are the sixth-, seventh- and tenth-largest, respectively, in the world by market value, according to KraneShares, KBA’s issuer. Of the nearly 570 Shanghai-listed stocks that will be made available in the Connect effort, those stocks represent 90% of the Shanghai Stock Exchange’s market value and 80% of the daily turnover, according to KraneShares data.
Mainland China P/E and Earnings Growth
Chart Courtesy: KraneShares