Bourse link plan to boost capital inflows

Linking the stock exchanges of Shanghai and Hong Kong will boost foreign capital in those markets and give them more say in the pricing of Chinese equities, an analyst said.

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Chen Li, chief China equity strategist with UBS Securities, said in a conference call on Wednesday that over the long term, foreign capital will account for nearly 10 percent of the free-float market capitalization of China's A-share market.

This would be one result of Shanghai-Hong Kong Stock Connect, a pilot program designed to allow mutual stock market access for investors on the Chinese mainland and Hong Kong.

The program was first announced in April and is expected to be officially launched in October. Initial rules regulated that trading will be allowed for only 568 stocks in Shanghai with an upper limit of 300 billion yuan ($48.8 billion).

At present, institutional investors outside the Chinese mainland can invest on the Shanghai and Shenzhen bourses only via the Qualified Foreign Institutional Investors program and the RMB Qualified Foreign Institutional Investors program.

According to UBS' estimate, foreign investors currently hold a total of 347 billion yuan in the A-share market. According to financial data provider Wind Information, the free-float value of the A-share market is approximately 10 trillion yuan.

"If the Shanghai-Hong Kong Stock Connect program goes well, and the domestic market heats up, the 300 billion yuan quota will run out within two years, and QFII, RQFII utilization will go up," Chen said. "In total, foreign investors could theoretically hold up to 900 billion yuan in China's stock market."

If the experience of Japan and South Korea in opening their stock market is any guide, foreign capital would mainly focus on blue chip stocks, Chen said, adding that the foreign investors could account for 25 to 30 percent of the market value of a single stock.

"In that case, they will undoubtedly have some pricing rights on the stock price, and the trading of these shares will be more active and linked more closely to the global market," he said.

Although Shanghai-Hong Kong Stock Connect provides more transparency and flexibility than QFII and RQFII, Chen said it will never completely replace those programs.

There are still technical restrictions in Shanghai—Hong Kong Stock Connect, including the two places' differing trading times, the uncertainty in levying capital gains tax and the risks of fluctuation in the exchange rate between onshore and offshore renminbi, he said.