The newly announced Shanghai-Hong Kong Stock Connect program is likely to progress fairly rapidly, which will benefit certain sectors in China’s A-shares market that are not available to overseas investors, such as defense, some strategic industries and service sectors, according to a new report by BofA Merrill Lynch Global Research.
The bank says that financial sector reform is the Chinese government’s priority, while capital account opening is one of the relative easy financial reforms due to weak institutional resistance. This should help onshore-offshore interest rates convergence and make RMB carry trade more attractive.
But, the launch of the stock connect program is unlikely to have a notable impact on the real economy in the short term.
The bank says that there is more offshore interest to invest in China’s A shares than onshore interest in Hong Kong-listed stocks. Nevertheless, some stocks in Hong Kong, including financial, telecom, gaming, some retailers with good brands on the mainland, should also benefit.
As a result, the A-H share premium spread will also narrow somewhat.
On another note, global indexes operator MSCI launched a consultation on the proposed index inclusion road map for China A-shares into the MSCI Emerging Market index on March 14. The result of the bank’s decision will be announced tomorrow on June 10.
If MSCI EM includes China A-shares with a 5% inclusion factor, we estimate an initial capital inflow to China A-shares of US$1.2 billion. Total passive inflow could be up to US$35 billion when MSCI and FTSE fully incorporates China A in their global standard indices.