U.S. Investors Pump Cash Into Funds; Tide Recedes in Hong Kong

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SHAFAQNA —The fanfare around the launch of a trading link that allows global fund managers to easily purchase stocks in Shanghai has helped turn U.S. investors into enthusiastic buyers of Chinese stocks. In Hong Kong, though, people are selling.

Investors plowed $259 million into U.S.-listed China-focused exchange-traded funds in November, turning them into net buyers for the year, according to Markit, a provider of financial data. They are betting that a wave of money flowing into China from big asset managers using the Stock Connect program will help lift the Chinese market.

In the same month, though, Hong Kong investors were selling, withdrawing $1.6 billion from Hong Kong-listed, China-focused ETFs.

To be sure, investors in Hong Kong had gotten in earlier, buying $2.5 billion in the year to date. Still, during October and November, the month when Stock Connect started, they scaled back investments in China after markets there recorded sharp gains.

The link between Shanghai and Hong Kong is one of China’s biggest steps to open its financial markets, granting global investors direct access to stocks in Shanghai and Chinese investors permission to buy shares trading in the former British colony. Underscoring its importance, it was unveiled by Chinese Premier Li Keqiang in April, and the start date was announced just hours before U.S. President Barack Obama landed in Beijing to attend the Asia Pacific Economic Cooperation summit in November.

But after a strong start, inflows of funds have slowed to a trickle as many big institutional investors are still awaiting approval to participate.

Money is flowing in via liquid instruments such as ETFs, which don’t involve the same compliance and regulatory hurdles as the new Stock Connect link.

“At the moment, ETFs are the easier option,” said Erwin Sanft, head of China and Hong Kong equity research at Standard Chartered PLC.

He says Stock Connect will over time become a better way to access China as the wrinkles are ironed out. “This time next year, we’re going to find a lot more large institutions participating,” Mr. Sanft said.

Since the link was launched on Nov. 17, investors world-wide have snapped up Shanghai stocks worth 38.35 billion yuan ($6.2 billion), far less, though, than the maximum 300 billion yuan permitted under the program’s rules.

Before the trading link opened, many investors in Hong Kong took advantage of the coming link by snapping up shares in China, known as A-shares, as they were cheaper than their Hong Kong counterparts, called H-shares.

“You had a clear opportunity to just buy A-share ETFs and go short H-share ETFs, and there have been investors making 5% to 10% just via implementation of this trade,” said Marco Montanari, head of passive asset management for the Asia-Pacific region at Deutsche Bank .

The flight of Hong Kong investors from China-focused ETFs since the trading link has started has left their U.S.-listed equivalents looking relatively more expensive.

U.S.-listed China A-share ETFs currently command a sizable premium over the stocks they track. In the case of Deutsche Bank’s x-trackers Harvest CSI300 China A-shares fund, the premium is 2.94%, according to Morningstar data .The fund’s Hong Kong-listed counterpart trades at a discount of 1.34%.

Source : online.wsj.com

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