Since China commenced on the path to economic reform in 1978, it has ensured its current position as one of the largest developing countries in the world with remarkable speed. The emerging stock market has experienced tremendous growth since the inception of the Shanghai and Shenzhen’s stock exchanges at the beginning of the 1990s. Essentially non-existent prior to December 1990, they have grown to become the second-largest in the world behind the US, totalling over $12 trillion in market capitalisation as of the end of 2017. At the same time, recent changes to restrictions on foreign investment have provided offshore investors with new access to China’s domestic stock markets and it is anticipated that China’s stock market will still develop swiftly in the future and will play a vital role in world markets.
China has delineated its plans to become a world superpower within the next 30 years, and to overtake the US. President Xi Jinping, speaking at the National Congress late last year, said it was time for China to become “a mighty force” that would lead the world on political, economic, military and environmental issues:
“The Chinese nation…has stood up, grown rich, and become strong – and it now embraces the brilliant prospects of rejuvenation. It will be an era that sees China moving closer to center stage and making greater contributions to mankind.”
As well as evolving into a rising global power China’s capital markets are evolving at great pace, there are major changes taking place in the Chinese stock market that could significantly impact investors. As Chinese capital markets are opened, global investors can participate in what will arguably be the most transformational century as China accelerates growth through productivity, focus on innovation and R&D under “Chinese Characteristics”. Chinese companies overtook Japan last year as the world’s second largest filers of patents according to the World Intellectual Property Organization. On current trends it will overtake the US within three years. Any investor who is underweight China in the coming years will significantly underperform global equity indices especially as Chinese equities are included more meaningfully in global indices after years of under-representation.
China is on a rapid path of change, and has already advanced more than the western world gives it credit for. The One Belt One Road, Made in China 2025 and Shanghai Cooperation Organisation initiatives all are representative of the growing importance of China ion the world stage. As President Trump makes the US an unreliable partner in globalisation, China is poised to pick up the slack with the One Belt One Road becoming a new venue for multi-lateral trade.
As Xi ramps up China’s imperial ambitions, in contrast, the US deficit deteriorates and the US follows an inward looking “America First” policy. This important trend will reshape geopolitical paradigms and the world order in a way that few have yet registered, providing global recognition for China’s financial markets and a greater international role for its currency. The real war will not be a Sino-US war over trade or technology but a struggle for dominance between the US dollar and the renminbi.
Changes in China’s capital markets
China is allowing increased foreign access to its financial markets in a bid to prove commitment to openness and liberalisation of its economy. The daily quota on the Hong Kong-Shanghai and Hong Kong-Shenzhen Stock Connect was quadrupled from May 1 2018. China's new central bank chief, Yi Gang, also publicised plans to remove limits on foreign ownership in the financial industry, ratifying China’s commitment to greater openness and access to the Chinese economy. Furthermore, speaking at the Lujiazui Forum on June 14, 2018, Peoples Bank of China governor Yi Gang, strengthened claims of commitment to yuan internationalisation, capital account convertibility and sustainable growth. A key takeaway from the forum was to put in to place an initiative, or “glorious mission” in Li Qiang’s word’s, to make Shanghai a global financial center with possible scope for expanding the range of foreign financial companies business, indicating an acceleration of “opening up” mandate.
The Stock Connect is already integrating Hong Kong, Shanghai, and Shenzhen, and has paved the way for MSCI’s decision to add 226 yuan denominated, locally listed Chinese companies to its MSCI Emerging Market Index on June 1, 2018. The inclusion in the MSCI EM Index puts A-shares on the global stage as an investable market. MSCI has signaled that China’s regulatory environment, liquidity environment and accounting principles are satisfactory for investors. Another attestation to the integration of China’s financial markets into international finance came in 2016 as the renminbi was included in the International Monetary Fund’s special drawing rights basket, making the renminbi part of global reserve currencies.
What is Stock Connect?
Stock Connect represents an opportunity to invest in China’s growing economy. This link between the Shanghai Stock Exchange and the Stock Exchange of Hong Kong, introduced in 2014, expands the connection between the mainland Chinese stock market and the rest of the world. In late 2016, the establishment of a similar link between the Shenzhen Stock Exchange and the Stock Exchange of Hong Kong marks the latest step.
The result has been a flood of opportunities for investors and companies inside and outside of China. The two cross-border schemes were major milestones in China’s efforts to open its markets. They allow international investors to trade A-shares listed in Shanghai or Shenzhen via any brokers licensed by HKEX, while providing mainlanders with a means to trade Hong Kong-listed stocks.
Shares listed on the Shanghai and Shenzhen stock exchanges will be available on Saxo Platforms through the Stock Connect programme from June 19, 2018.
This comes at an opportune moment as the China Securities Regulatory Commission has increased the daily quota of mainland China-listed shares that can be bought in Hong Kong via the Stock Connect channel to Rmb52bn ($8.3bn) from Rmb13bn. Additionally, the CSRC has said it will increase the amount of money that can flow Southbound thorough Stock Connect, by quadrupling the daily amount of Hong Kong-listed shares that investors can buy through mainland Chinese stock exchanges.
This combined “China” stock market ranks as one of the world’s largest. Combined market cap – $12.45 trillion.