Foreign capital set to make huge impact on China equity market

March 11, 2019 12:59
The continued inflow of foreign capital could make China's equity market more mature and professional, rather than being overly driven by speculators as it is now. Photo: Reuters

Several A shares have recently hit their foreign ownership limit.

Under the existing Stock Connect scheme, foreign ownership ceiling for individual stocks listed on the A-share market is set at 30 percent. The Hong Kong exchange will suspend taking buy orders for an individual stock if the foreign ownership hits 28 percent. Purchase orders will again be allowed when the ratio falls below 26 percent.

For example, foreign buy orders for shares in Shenzhen-listed Han’s Laser Technology (002008.CN) was blocked after the offshore ownership of the firm hit 28.23 percent. It’s the first Chinese stock that hit the foreign ownership ceiling since the cross-border stock trading scheme was launched.

Numerous counters also saw their foreign ownership ratio reach more than 20 percent. Among these is home appliances manufacturer Midea Group Co. (000333.CN), of which foreign investors hold more than 27 percent.

By the end of last year, foreign investors held 1.3 trillion yuan (US$193.37 billion) of A shares, or 7 percent of all free-float A shares. That follows right behind the 1.47 trillion yuan worth of A shares held by Chinese mutual funds.

For a couple of reasons, foreign capital looks set to surpass domestic mutual funds and become the biggest institutional investors in A shares

Global index provider MSCI said last Friday that it will increase the inclusion factor of Chinese large-cap stocks to 20 percent from the current 5 percent in three steps. Earlier, the FTSE Russell also decided to include A shares in its global indices. These moves are expected to bring 600 billion yuan of capital from global passive index funds into A shares.

Meanwhile, Fang Xinghai, vice chairman of China Securities Regulatory Commission, revealed at the annual Two Sessions that the regulators are considering opening up the stock index futures market and launching relevant products this year.

That would provide an efficient short-selling tool for A-share investors to hedge risk. Availability of hedging means is a prerequisite for many leading international funds to build positions in A shares.

Retail investors still dominate the domestic stock market, holding about 43 percent of the A shares currently. The continued inflow of foreign capital is set to give foreign investors more pricing power and the China equity market could become more mature and professional, rather than being overly driven by speculators as it is now.

At the same time, A shares could become more sensitive to international market movements and global capital flows.

This article appeared in the Hong Kong Economic Journal on Mar 8

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal columnist