Accessing China’s Capital Markets - Openings and Considerations for Malaysian Investors

Despite heightened market volatility within China’s capital account, the nation continues to present opportunities for Malaysian investors through the introduction of cross-border programmes. Panellists at a recent HSBC Malaysia forum discussed the challenges and opportunities.

General enquiries

Much has been written about the volatility recently experienced in China's equities and currency markets. And while these events have caused unease among the international investment community, recent reforms that allow foreign access to China’s capital account, coupled with the sheer size and trajectory of its economy, continue to make the nation an attractive investment destination, providing trades are well-informed and executed with prudence. These were the views of panellists at a discussion titled Investing in China and RQFII Programme, part of the HSBC Economic & FX Outlook 2016 that was staged in Kuala Lumpur.

"China is still the fastest growing major economy in the world, accounting for about one-third of global GDP growth," remarks John Zhu, Greater China Economist, HSBC Hong Kong. "Given that the nation will continue to grow by between 6 per cent and 7 per cent annually, and in absolute terms there is still a lot wealth created every year, it makes sense to invest in China, providing investors have a long-term horizon," he adds.

According to China’s National Bureau of Statistics, the nation’s economy grew by 6.9 per cent in real terms during 2015[i]. Growth has slowed, but it is growing off a much bigger base - China's economy stands at USD10.3 trillion[ii] in 2014and the nation added USD448 billion to the global economy in 2015 - numbers that are sometimes overlooked by financial commentators and which reiterate the importance to China in the global markets.

Zhu attributes the economic drivers of present-day China to trends that will continue to advance its economy over the next decade and beyond, and which will ensure the nation remains relevant to foreign investors for the foreseeable future. These include the country's transition from a low value chain manufacturer to a provider of higher-value added goods and services. And, how rapid urbanisation, which will grow nationally by about 300 million people by 2030[iii], is driving demand for consumer goods and services.

"China's urbanisation is not a one- or two-year story. It is something that will play out over decades and will see growth in facets of the Chinese economy that are needed to support people moving into cities, like healthcare, education and infrastructure," Zhu adds.

Increased Onshore Access

While access to China's onshore capital markets remain somewhat restricted, they are nonetheless increasingly opening up to international investors. For Malaysian-based investors, two initiatives allow industry players to benefit from China’s vast capital account: the Shanghai-Hong Kong Stock Connect (SHKSC) via an authorised Hong Kong-based brokerage; and the RMB Qualified Foreign Institutional Investor (RQFII) programme, which can be directly accessed by asset management and fund firms located in Malaysia.

Both schemes allow investors to tap into equities listed on the mainland. A joint venture between the Shanghai Stock Exchange (SSE) and the Hong Kong Stock Exchange (SEHK), the SHKSC provides offshore traders access to Chinese A-share cash equities listed on the SSE. Simultaneously, it grants mainland investors access to H-share cash equities listed on the SEHK. Launched as a pilot in November 2014, offshore participants of the SHKSC are mainly institutional investors and fund managers. Combined, they have been set a daily and aggregate monthly quota of RMB 13 billion (USD2 billion) and RMB 300 billion (USD46 billion), respectively.

Open to Malaysian-based investors since November 2015, the RQFII initiative allows fund and securities management companies to purchase Chinese A-share equities from the Shanghai and Shenzhen stock exchanges, and RMB-denominated bonds and bond funds issued on the mainland. Furthermore, RQFII enables market participants to invest or hedge their positions in the onshore futures market.

"RQFII grants Malaysian investors the opportunity to access all equities listed in China - including those listed on the Shanghai and Shenzhen stock exchanges. It also opens up the nation’s fixed income market," explains Patrick Wong, Head of China Sales and Business Development, HSBC Securities Services Hong Kong. "The current quota stands at RMB 50 billion (USD7.5 billion). Subject to demand, this could double, like that of Singapore, which was recently raised from RMB 50 billion to RMB 100 billion (USD15 billion)," he adds.

Wong additionally notes new indices issued by FTSE Russell, which features Chinese equities in two transitional emerging market indexes. The China A shares weighting can rise to 32 per cent in the long run.  This would offer global investors - including those from Malaysia - further exposure to China's capital markets.[iv]

Market Knowledge

Successfully navigating both China's capital markets and today's volatile trading conditions require in-depth insight of the array of unique attributes that the onshore market exerts. Indeed, according to forum panellists, a plethora of difficulties await investors that are unfamiliar with how China’s equity and fixed income markets operate, where ill-informed trades can result in significant losses. Anthony Shaw, Head of Institutional FX & Flow Rates, HSBC Hong Kong, asserts that to successfully trade in China, market participants must conduct a detailed, cross-asset and intra-asset relative value analysis that fully informs investors of the risks and opportunities the market holds.

In addition, panellists remark that further opening up China’s onshore capital markets will result in a ‘win-win’ scenario for foreign and domestic players. Increased participation would generate greater market liquidity and provide yield opportunities for local institutional investors, while presenting greater investment opportunities for overseas investment firms that have RMB quotas.

Trusted Partnerships

Ultimately, to find success in the onshore market requires overseas investors to work with established players and the Chinese authorities. With more than 150 years of trading in China, HSBC is such an organisation, which can help firms realise investment goals within China.

"With a substantial retail, wealth and commercial banking presence internationally, supported by a large investment banking network across the nation's equity and debt capital markets, HSBC provides thought-leadership that enables domestic and international investors to engineer an investment decision that capitalises on the yields, breadth of product and opportunities this vast nation has to offer," says Shaw.

"We strongly encourage investors to look at the Chinese market from a fresh perspective, and to leverage trade partners like HSBC, in order to gain local insights that are going to determine which asset classes and asset allocation makes most sense at this point in time," he concludes.

[i] http://www.stats.gov.cn/english/PressRelease/201601/t20160119_1306072.html
[ii] http://data.worldbank.org/country/china
[iii] http://blogs.worldbank.org/eastasiapacific/bold-steps-chinas-cities
[iv] http://www.ftse.com/products/indices/media/getpressrelease?title=FTSE+starts+transition+to+include+China+A +Shares+in+global+benchmarks_1357849

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