Six years ago, a widely anticipated policy that was to allow Chinese mainland investors to invest in Hong Kong stocks sent the city's share prices soaring sky high. But the opening of a reverse route is likely to receive the cold shoulder from cross-border investors.
Allowing Hong Kong residents to trade A-shares won't have much impact on the domestic equity markets, according to Chen Li, head of China equity strategy at UBS. “It only provides alternative investment options such as pharmaceutical companies and companies engaged in Chinese traditional medicine, which are rare in the Hong Kong stock market,” he said.
However, China’s leading property developers currently trade at an average 2013 price-to-earnings ratio of 7.5 times, which is much cheaper than their Hong Kong-listed counterparts that are quoted at around 10 times. That could potentially make A-share listed property groups attractive to cross-border investors, Chen added.
And China’s securities regulator is now trying to breathe life into the domestic equity markets by engineering a capital inflow from overseas.
The China Securities Regulatory Commission (CSRC) announced last week that it will allow financial institutions in Hong Kong to raise renminbi funds for investments in the A-share market. Previously, only Hong Kong subsidiaries of mainland brokerage and fund management firms had the right to do so.
The CSRC also gave a green light for Hong Kong, Taiwan and Macau residents living in the mainland to open A-share trading accounts. The new rule is aimed to “facilitate their access to investment in the domestic market”, the CSRC said in a statement.
There are around 450,000 residents from Hong Kong, Macau and Taiwan living and working in the mainland, according to official data.
Despite its weak performance in recent years, UBS has a positive view on the A-share market in 2013. Chen reckons the benchmark index will climb to 2,600 points this year, which implies a 20% increase. Corporate earnings will rise about 13% this year compared with zero growth in 2012.
But he admits that the policy-driven market doesn't have a clear direction at the moment because the authorities are consumed with institutional restructuring.
Other experts share that view. “Post the National People’s Congress, we see a lack of headline announcements and positive news flow on reforms, but the focus is shifting to implementing the institutional restructuring plan, the new five guidelines for the property sector, income distribution, and energy price deregulation,” said Steven Sun, head of China equity strategy at HSBC.
Hence the market may drift sideways until more signs of growth and earnings recovery emerge, he added.
Although the benefits may be limited, experts agree that opening the door to Hong Kong investment is a step forward in terms of freeing up China's financial system. Hong Kong will benefit once a two-way cross-border investment channel is established.
The People’s Bank of China said in January that it is in the process of preparing a scheme that will increase outbound investment by the country's private sector ― a programme similar to the so-called through-train, which was first announced in 2007 to allow mainland citizens to trade Hong Kong stocks. The through-train was never implemented, but even the suggestion of such a scheme stirred a jubilant market response and the Hang Seng Index shot up to a historical high above 30,000 points in October that year.
The difference between the euphoria in 2007 and the muted response to the recently announced gradual opening of the A-share market suggests that Hong Kong is more attracted to the mainland's capital than to its stock markets.