Starting on Monday, investors anywhere in the world will able to purchase shares of companies listed on the Shanghai Stock Exchange. It’s yet another sign that China is opening up its economy.
“It’s a very, very important day for China and for the world financial system,” said Donald Amstad, Asia business development director at Aberdeen Asset Management, CNNMoney reported.
Previously, only a select group of institutional investors that met certain qualifications had access to Shanghai’s $2 trillion market.
The bad news is the new program, known as the Shanghai-Hong Kong Stock Connect Program, is a bit clunky for everyday US investors.
A typical American can only buy shares in Shanghai by first going through a broker in Hong Kong who then must go through the Hong Kong Stock Exchange, which is linked to the Shanghai Exchange.
Moreover, most people buy individual stocks through a broker account, but don’t expect to log online and be able to buy right away.
Both Charles Schwab and TD Ameritrade told CNNMoney they are not participating in the program -- for now.
“We’re going to take a bit of a wait-and-see attitude to see what the demand is like before we throw resources at it,” said JJ Kinahan, TD Ameritrade’s chief strategist.
E*Trade didn’t respond to a request for comment.
Still, the new program should pave the way for more mutual funds and exchange-traded funds (ETFs) to gain exposure to mainland China.
Hurdles
Maybe all the hurdles aren’t such a bad thing. Investors need to exercise caution before jumping into Chinese equities.
Even though the Chinese economy has exploded over the past two decades, the Shanghai Composite is virtually flat over that span. Management teams tend to be a lot younger in China, meaning they are far less experienced than the savvy captains of industry in the US.
“This is not a market where you take a passive, index-hugging approach to investing. China, above all markets, is a market where you’ve got to be very selective and very careful about the names you buy,” said Amstad.
While corporate governance standards are improving, China still has a long way to go. China received a corruption score of 40 from Transparency International in 2013. That makes it slightly less corrupt than Russia but more so than Brazil, Saudi Arabia and Ghana.
Yuan Conversion
Hong Kong will scrap the daily 20,000 yuan ($3,264) conversion limit for residents from Monday when a landmark scheme to link the city’s stock market with Shanghai is launched, facilitating investment flows into China’s stock market.
Regulators said this week the cross-border share trading scheme would start on Monday, a crucial step in China’s efforts to open its capital markets and to allow Hong Kong residents to choose from a wider menu of yuan-denominated assets apart from bonds.
“The removal of the daily conversion limit will facilitate Hong Kong residents’ participation in the Shanghai-Hong Kong stock connect as well as other investments and transactions denominated in the yuan,” Norman Chan, chief executive of the Hong Kong Monetary Authority, told reporters.
Chan said the 80,000 daily yuan remittance quota across borders for Hong Kong residents remains due to mainland regulations while the foreign currency conversion to yuan will take place at offshore market rates.
While Hong Kong has allowed non-residents to convert unlimited daily quantities of yuan since 2012, it has capped the conversion limits for residents at 20,000 yuan since 2004, because it wanted to prevent rampant currency speculation.
A yuan cash shortage in Hong Kong may be exacerbated in the initial days of the stock-connect launch due to high demand for relatively undervalued Shanghai-listed shares, analysts say.
