The new rule, introduced late last month, meant Chinese mutual funds no longer required a domestic institutional investor licence (QDII) to invest in Hong Kong-listed stocks.
“This announcement triggered the rally but it is not the change of rules in itself that created the massive inflow,” said Karine Hirn, co-founder of East Capital.
Previously Chinese fund managers had to use the QDII program, which Hirn said was never a big success and squashed interest for Hong Kong and other overseas market. This meant the so-called ‘southbound’ trading link – which is the flow of funds from Chinese investors into Hong Kong – was an under-used channel.
“The signal sent by the change in rule was interpreted as support from the authorities to the southbound program,” said Hirn.
The daily southbound quota was used up for the first time on 8 April, reaching a record turnover of RMB16.8bn (£1.81bn, €2.52bn, $2.71bn), causing a 16% boost to Hong Kong’s Hang Seng Index. Since the Stock Connect scheme launched in November, only 5-10% of the quota was filled on a typical day.
“Catalyst for action”
John Ventre, head of Old Mutual Global Investors multi-asset funds, suggests the change in rules to the Stock Connect scheme was a “catalyst for action”, but said it was not just the flow that pushed the index up, but the expectations in future flow.
Previously mainland investors were paying 35% more for A-shares than Hong Kong investors were paying for H-shares in the same companies, but this dropped to 28% on 8 April.
“It’s an exaggerated effect; some investors look at the change in the rules and think this gap is likely to close, so they are buying Hong Kong stocks early to get the discount,” he said.
“This is the first step in the gradual relaxation of capital controls in China, and the end game for China is to release these capital controls.”
Schroders Asian equities team said the rising premium of A-shares over H-shares also drove China’s onshore capital south. “Chinese investors were increasingly looking to capitalise on the price gaps between onshore and offshore markets.
“With the A-share market still rising in spite of weak economic data and poor company earnings in China, H-shares are becoming an increasingly attractive alternative.”
Head of product management in Fidelity Worldwide Investments’ Asian division, Matthew Sutherland, said the team is “not chasing momentum”.
“We are continuing to find such opportunities in both the onshore and offshore China market.
“Where stocks have run up significantly and valuations have become stretched there has been a small amount of rotation into cheaper opportunities. But for the most part, our managers are not trading, but are staying calm and continuing to do what we do best – investing fundamentally.”
