2021 may become a turning year for foreign capital to allocate additional A shares.
On the one hand, China continues to promote opening to the outside world. On December 24, Shanghai Shenzhen Hong Kong Stock Exchange and China Clearing announced that they had reached a consensus on the overall scheme of integrating ETF into the subject of interconnection. ETF is expected to be incorporated into the interconnection mechanism, and the interconnection mechanism between the two places will welcome capacity expansion.
On the other hand, China’s economy has developed steadily and continued to attract foreign investment. As of December 24, in 2021, the Shanghai Hong Kong stock connect and Shenzhen Hong Kong stock connect had realized a net capital inflow of 417.5 billion yuan, probably reaching an annual high. It is worth noting that the 417.5 billion yuan in 2021 is realized when MSCI and FTSE Russell have not further improved the inclusion factor of a shares. That is, it is not the result of “mindless buying” of passive funds, but the product of active funds to allocate A-Shares and change its global asset allocation pattern.
sudden change of wind direction of funds in the North
The funds flowing into A-Shares through Shanghai Hong Kong stock connect and Shenzhen Hong Kong stock connect (northbound funds) include a considerable proportion of long-term funds that strictly abide by investment discipline. Due to their sensitivity to valuation, northbound funds may lead the market under specific market conditions. For example, in the second half of 2018, northbound funds took the lead in increasing positions, leading the rebound of A-share market in 2019. Therefore, the trend of northward funds has attracted much attention.
According to statistics, since December 2021, northbound funds seem to have changed the wind direction, consumer blue chip and finance have regained their favor, and the previous “heart good” new energy related stocks have been abandoned. For example, among the top ten stocks with net inflow in the same period, three seats were occupied by financial stocks. In addition, Kweichow Moutai Co.Ltd(600519) regained favor. The trend of northbound funds triggered Market Discussion on whether the A-share market will turn again in 2022 and return to the value blue chip time in 2017.
From December 1, 2021 to December 24, 2021, there are many stocks with net capital inflow from the North:
With the deepening of foreign capital’s involvement in A-Shares and the increase of exchanges between domestic and foreign capital, the operation style of northbound funds and public funds also have similarities.
Chen Nan, senior quantitative expert of Tonglian data, compared the quarter end shareholding data of northbound funds and public funds by the end of the third quarter of 2021, and found that there are many similarities in their operation styles.
For example, according to Chen Nan, from the perspective of heavy position stocks at the end of the quarter in 2021, the top ten heavy position stocks of both hold Kweichow Moutai Co.Ltd(600519) , Contemporary Amperex Technology Co.Limited(300750) , Wuliangye Yibin Co.Ltd(000858) , Longi Green Energy Technology Co.Ltd(601012) , China Merchants Bank Co.Ltd(600036) , and the heavy position stocks are concentrated in the large market value and leading stocks of the industry. Since 2018, the top five heavy positions of the two industries are also similar every year. For example, in 2021, both of them have heavy positions in food and beverage, medicine and biology, power equipment, etc.
This shows that domestic and foreign capital have more consensus on the value of A-share investment.
However, the data also show the difference between the two. Chen Nan pointed out that the distribution of the ten major heavy positions in the past was more evenly distributed in the north capital sector, while the public fund was heavily distributed in the food and beverage industry, while the position in 2021 was concentrated in the Baijiu industry. In terms of heavy position industry, northbound funds have been heavy positions in banks and household appliances in recent years, while public funds are heavy positions in electronics and chemical industry. Why are these differences present? Chen Nan believes that northward funds may be more “value investment” and more recognized the rebound of undervalued value. For public funds, there may be performance pressure. Banks have not been recognized by the market and will choose industries with more room for rise. In recent years, the distribution of industries in the North has changed slowly. Food and beverage positions have been high since 2018. The position change of public funds is relatively more suitable to change with the market.
the investment scope is relaxed and QFII quantity blowout
At present, the stock interconnection mechanism of Shanghai Hong Kong stock connect and Shenzhen Hong Kong stock connect and QFII are the main paths for foreign investors to distribute Chinese stocks. In November 2021, after the implementation of new QFII regulations, the number of QFII blowout.
Since the first batch of QFII began trading in 2003, QFII has a history of 18 years. Why did the number of QFII suddenly blow out in 2021?
In this regard, Fang Dongming, China head of UBS’s global financial markets department, explained that there are several reasons behind QFII’s renewed attention by investors. First, compared with the Shanghai Hong Kong stock connect and Shenzhen Hong Kong stock connect, the scope of foreign investment can be wider through the QFII mechanism. The subject matter of QFII covers all A-share stocks, while Shanghai, Shenzhen and Hong Kong stock connect covers only part of A-share stocks. Secondly, some investors can participate in futures hedging by using QFII mechanism, such as using index futures in trading. Under the QFII mechanism, foreign investors can also use commodity futures, options and other tools, while under the Shanghai Shenzhen Hong Kong stock connect mechanism, investors are temporarily unable to use these tools. Finally, investors can only participate in block transactions, fixed growth and IPO through QFII.
Zhou Cheng, head of China’s financial industry research at Credit Suisse, said that the QFII mechanism, Shanghai Hong Kong stock connect and Shenzhen Hong Kong stock connect complement each other. QFII’s investment scope and flexibility are better than those of Shanghai Shenzhen Hong Kong stock connect. Although the new QFII regulations relax the access threshold, the threshold of Shanghai Shenzhen Hong Kong stock connect is relatively lower. In addition, in terms of investment currency, Shanghai Shenzhen Hong Kong stock connect adopts RMB, while QFII is mainly USD.
Lu Tian, deputy general manager of Goldman Sachs Gaohua Securities Co., Ltd., also echoed the above views. He said that compared with QFII, the Shanghai Shenzhen Hong Kong stock connect is relatively more convenient; But QFII can invest in a wider range of stocks. In addition, QFII can participate in the subscription of new shares, fixed increase, margin trading, etc., as well as investment in futures options, private funds, etc. Under the Shanghai Hong Kong stock connect and Shenzhen Hong Kong stock connect mechanisms, foreign investors are temporarily unable to participate in these transactions.
For UBS, Credit Suisse, Goldman Sachs and other institutions, helping other institutions layout China is an important part of their business map in China. Therefore, they can witness the changes of foreign institutions participating in the Chinese market.
For example, Goldman Sachs and its domestic wholly-owned securities companies and futures companies can help customers execute all A-share, H-share stock and futures transactions of QFII and Shanghai Shenzhen Hong Kong stock connect north-south. Goldman Sachs said that among the earlier QFII qualified institutions, there are relatively more sovereign funds and mutual funds, while the composition of new QFII applicants is more comprehensive, including relatively small financial institutions. This shows that under the new QFII regulations, the enthusiasm of foreign-funded institutions to apply for QFII has increased significantly. In particular, more and more foreign-funded institutions that take futures, margin trading and securities lending as an important part of their investment strategies have launched the QFII application process.
foreign investors expect more details of the new QFII regulations to be implemented
What are the most concerned opening-up measures of follow-up foreign-funded institutions?
Fang Dongming said that China’s market continues to promote opening-up, and foreign institutions are increasingly involved in China’s capital market. Fang Dongming mentioned that overseas investors want more and more effective hedging tools. In addition, in the general direction of expanding the investment scope of QFII, I hope the measures can be implemented as soon as possible. For example, the trading of commodity futures and related option products, such as the settlement system of T + 0 and the establishment of comprehensive accounts of different products.
Coincidentally, Lu Tian also said that foreign institutions look forward to the implementation of the specific details of the new QFII regulations. For example, investment in futures option varieties of various exchanges, participation in margin trading and other specific operation details are arranged and implemented, “especially the implementation of details that are quite different from the practices of overseas markets, such as margin trading collateral and contracts, price increase trading rules, etc.”.
Zhou Cheng said that foreign institutions also expect relevant parties to further improve foreign shareholding restrictions and improve foreign exchange management and income tax policies related to QFII.
With regard to the recent regulations of regulators on “fake foreign capital”, Fang Dongming said that “fake foreign capital” accounts for a small proportion in the whole Shanghai Shenzhen Hong Kong stock connect, about 1%, about 39000 accounts. He believes that the main purpose of supervision is to clarify the qualifications of investors. It has no impact on most foreign institutions investing in China through the Shanghai Shenzhen Hong Kong stock connect. He believes that with the continuous orderly opening of the Chinese market, different types of foreign capital continue to enter. Whether medium and long-term or medium and short-term quantitative hedging strategies will continue to increase investment in the Chinese market.
Sheng Yuanjun, chief investment officer of Tonglian data, also said that regulators restrict mainland investors from buying and selling stocks through Hong Kong stock connect, which is more to return to its origin, prevent mainland investors from buying and selling A-Shares as foreign capital, generate market confusion information, and crack down on some cross-border illegal activities. Due to the small volume of this part of funds, this has little impact on the overall market. From the perspective of regulatory trend, it may be more stringent in the future. Private equity funds established by some mainland institutions in Hong Kong or overseas trade A-Shares through leveraged financing. It is not difficult to find from the recent fluctuations of such products, and investors’ expectations are also changing.
MSCI and FTSE Russell revealed next step a focus
The inclusion of international indexes in A-Shares and the allocation of additional A-Shares to foreign capital play a leading role. What factors will MSCI and FTSE Russell consider before further improving the A-share inclusion factor?
In this regard, Xu Wei, vice president of MSCI Asia Pacific Research Department, told China fund news that for international investors, there are four concerns about the further development of a shares.
First, obtain hedging and derivative instruments: international institutional investors need to obtain liquid onshore and offshore index futures and option contracts to expand their allocation in China and manage their increased risk exposure. Index futures and option contracts are important risk management tools for global investors, especially for China’s complex, deep and diversified stock market.
China’s A-share settlement cycle is relatively short. International institutional investors said that they still face major operational challenges and risks in dealing with the short settlement cycle of China’s A-share. At present, China adopts the delivery and settlement cycle of T + 0 / T + 1 non delivery versus payment. Most markets of MSCI acwi (MSCI all countries world index) currently adopt the settlement cycle of T + 2 / T + 3 cash for goods (DVP).
Secondly, interconnection trading holiday arrangements: international institutional investors are worried about the dislocation between China’s onshore securities trading and interconnection holidays. Given that most global institutional investors regard interconnection as the main channel for investing in China’s A-share market, it is necessary to screen the current interconnection trading holiday arrangements to minimize unnecessary investment friction.
Third, form an effective comprehensive trading mechanism in interconnection: some large fund management companies and securities companies said that there is an urgent need for a well functioning comprehensive mechanism. The ability to place unified orders for multiple customer accounts is very important to help international institutional investors achieve the best execution and reduce operational risk in the investment process.
Fourth, in terms of hedging and derivatives, the MSCI China A50 interconnection index futures contract and ETF products recently approved by Chinese regulators enable investors to have more risk management tools, which is a landmark development.
“As for other aspects, we have also noticed that improvements have been made at the transaction level, including SPSA centralized management service and comprehensive settlement platform, which have played a very positive role in China’s financial system reform. Generally speaking, the development we see is good. MSCI has always maintained communication with global investment institutions. In the next step, the inclusion of A-Shares must be through public consultation. At present, we do not have it Schedule. ” Xu Wei said.
Du Wanming, head of FTSE Russell Asia Pacific Index policy, also said in an interview with reporters that there are still some problems to be solved to further improve the inclusion arrangement of a shares.
The first is that the time of trading holidays in the two places is inconsistent. It is expected that the relevant parties will provide some expedient measures to enable investors to participate in trading when Hong Kong is on holiday and the mainland is still trading.
The second is to further liberalize the stock scope of Shanghai Hong Kong stock connect and Shenzhen Hong Kong stock connect. At present, although there are more than 1000 stocks in the interconnection list, some stocks that meet the inclusion rules of FTSE Russell index cannot be included because they have not entered the interconnection mechanism. If the scope of interconnected stocks is relaxed, it will attract more overseas funds to enter a shares.
Third, in terms of QFII / rqfii, the problems of pre financing and payment for goods (DVP) also need to be solved.
Fourth, with the increase of A-share investment by overseas investors, the 30% shareholding limit may be easier to reach in the future. If regulators can relax the shareholding limit of foreign investors, it may attract more overseas passive and active incremental funds.
Fifth, the Hong Kong Stock Exchange has piloted the master SPSA, and FTSE Russell is also observing the pilot effect.
(China Fund News)
