Goldman Sachs remains upbeat about the Shanghai-Hong Kong Stock Connect, despite the slower flow of southbound capital, noting that more time is needed for mainland investors to familiarize themselves with the Hong Kong market.
Since the Shanghai-Hong Kong Stock Connect kicked off on Monday, investment from Hong Kong has been outpacing the flow of funds from the mainland.
But this is just to be expected as northbound capital is mostly flowing from institutional investors who are already familiar with the A-share market, while southbound funds are mainly coming from retail investors, chief China strategist Kinger Lau said.
“For the northbound channel, it’s mostly for global institutional investors. But the southbound channel, it is more for retail or individual investors. By definition, if we have institutional investors versus retail investors, the size of the trade will be very different,” Lau said.
Many of the global investors have prepared well for the A-share market over the past six months, but retail investors on the mainland need more time to warm up and understand the trading environment in Hong Kong, he added.
Timothy Moe, chief Asia-Pacific strategist at the US investment bank, cited the exchange rate factor. He said the 6 percent difference between onshore and offshore renminbi could be a disincentive for mainland investors.
On the second day of the Stock Connect, 63 percent of northbound daily quota of 13 billion yuan (US$2.12 billion) remained unused, while about 93 percent of the southbound quota of 10.5 billion yuan was still available at the end of the trading day.
Lau also said that most northbound investors including hedge funds are still setting up their systems for the cross-border trading scheme.
“They are not ready for day one or week one trading because it takes a lot of time for them to set up the back-end infrastructure, compliance and all the legal procedures,” he said.
Lau stressed that the Stock Connect is very beneficial for the long-term development of both the Hong Kong and Shanghai markets. The scheme will allow A shares to be included in the MSCI global index in 2015, he said.
“We cannot just look at the trading volume or market reaction in one day and judge whether the policy is useful over the mid and long term,” Lau said.
For mainland investors, the trading link offers a channel for mainland investors to diversify their portfolios, as more than 70 percent of the assets of mainland investors are in the property market while equities account for less than 7 percent, he said.
A lot of small and medium-sized stocks in Hong Kong have big discounts compared with their counterparts in the A-share market, making them very attractive to mainland investors, Lau added.
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