A steamless train

News of a pilot scheme to allow individual investors in the mainland to buy Hong Kong-listed stocks was greeted with joy in September.

The Hang Seng Index hit a new record, closing above 24,000 on September 5, as the market expected mainlanders to pour their money into Hong Kong stocks. Not only would these newcomers have the chance to diversify their holdings but they could also take advantage of the fact that dual-listed H-shares and red chips trade at a discount in Hong Kong compared to Shanghai and Shenzhen.

But the euphoria has since died down and the promised wave of money from mainland savings has not gushed forth. Indeed, at the time of writing, the pilot scheme, which is to run through Bank of China branches in Tianjin, was on the rocks. According to reports, the State Council withheld final approval for fear of creating an H-share bubble and a corresponding drop among A-shares.

Now, some analysts say that even when the scheme finally does come online, its impact will be minimal.
“If you take the biggest drop [in household savings] during recent stock market surges and assume all the money is poured into the Hong Kong market, it’s still only a low single-digit percentage of the market cap here,” said Frances Cheung, an economist at Standard Chartered in Hong Kong.

Potential winners

With the US$50,000 cap on foreign currency exchanges by individuals removed for the purpose of this scheme, it is inevitable that some investors will spend big. The beneficiaries are likely to be well-known firms not listed in the mainland like China Mobile, Nine Dragons Paper Holdings and Gome, said Fraser Howie, head of structured products at CLSA.

However, it is difficult to say whether their stock prices will be driven up by sentiment or real money. Howie noted that prices might rise as Hong Kong investors buy in, anticipating a rush of mainland money. Group psychology, not actual funds, would play a bigger role there.

Individual investment philosophies will also moderate the scheme’s influence. As Howie noted, mainland investors are not in the market for the long-run, so they have little incentive to leave the red-hot A-share markets for the somewhat cooler Hong Kong exchange.

Outward bound

Nevertheless, the scheme is part of wider initiative that has seen Chinese capital controls loosened to allow more money to be invested abroad.

In August, special bonds were sold to the central bank to generate capital for the new China Investment Corporation, tasked with finding higher returns for a large chunk of the country’s US$1.3 trillion in foreign exchange reserves.

Further reforms are being spearheaded by the Qualified Domestic Institutional Investor (QDII) scheme, which is also designed to channel Chinese capital into foreign markets. One domestic player is already taking full advantage of the scheme. In mid-September, China Southern Fund Management launched a fund that will invest exclusively in overseas equities. It attracted US$6.6 billion in subscriptions on its first day.

Together, these schemes have sparked fears that Chinese money will flood global markets and send prices skyrocketing in everything from property to stocks.

According to Cheung and other economists, however, China has been anything but reckless in its liberalization. The through-train scheme is just the latest example of China’s gradualist approach to liberalizing its capital accounts.

“It’s a step forward,” said Cheung. “It means we can expect more [liberalization] which may take quarters or even years.”

The decision to launch the individual scheme in Tianjin reinforces the government’s gradualist philosophy.

The city’s Binhai New Area has been earmarked as an experimental special economic zone, much like Shenzhen in the south and Shanghai’s Pudong. The through-train scheme, if it eventually happens, will be a major boost for the northern port city because it will underline the zone’s growing significance in the country’s financial reforms.