Rediscovering China opportunities for equity investors

As China enjoys its post-pandemic economic recovery, international investors are rediscovering the unique opportunities available in the country’s onshore stock market. In January alone, net foreign purchases of Chinese A-shares in Shanghai and Shenzhen via Stock Connect surged to RMB141 billion (USD19.8 billion), double the equivalent period in 2022¹ – a record high since Stock Connect was launched in 2014.

Part of this enthusiasm is due to the strength of the rebound, with HSBC projecting its 2023 growth forecast to 5.3%². Consumption is an increasingly important driver of the economy, and the onshore stock market is home to many of China’s largest domestic consumer brands, which are unavailable elsewhere.

In addition to consumption, several other of the main Chinese investment themes are well represented in the A-share market. With signs that regulatory tightening has passed for the technology industry, there is renewed interested in China’s tech-sector, and there is a host of fast-growing companies listed on the growth enterprise boards in Shanghai and Shenzhen.

Sustainability is another key theme that can be realised via A-shares, with stocks that provide exposure to renewable energy, electric vehicles, and battery technology.

More broadly, there are long-term structural considerations that favour the A-share market. Although China’s onshore stocks are already part of the relevant global indices, international investors remain underweight the market. This will likely change as investors gradually increase their allocation to China.

These purchases are taking place at a time of significant change to the mutual access schemes that link China’s onshore and offshore markets. In particular, Stock Connect has seen the most change – improving the channel that, for most international investors, provides the most straightforward access to the A-share market via familiar market infrastructure in Hong Kong.

“Over the last year, a series of enhancements have resulted in a considerable expansion to the range of securities available via Stock Connect – providing international funds new ways to invest in the world’s second largest stock market,” said Russell Jacobsen, Head of China Access and Strategic Development, Equities Product, HSBC.

In July 2022, a new asset class was added to Stock Connect. One year later and 97 onshore-listed exchange traded funds are now available for trading via the northbound channel, with another five on the southbound channel. A year after launch, the take up has been strong – especially in southbound trading, as ETFs that provide exposure to Hong Kong-listed Chinese technology companies proved particularly popular.

Another milestone came in March 2023, when the northbound and southbound channels of Stock Connect expanded to cover a much broader range of shares. On northbound trading, the number of tradable A shares rose to 2529 stocks in Shanghai and Shenzhen, representing about 83% of the total market capitalisation³.

One consequence of the expansion is that offshore investors can invest in more stocks on the onshore growth enterprise boards, with 66% of the Shanghai STAR Market now accessible via Stock Connect.

“The market demand for expansion was very strong, and we have seen a clear trend in recent years of the shares held by foreign investors becoming more diversified,” said Feng Chen, Director of International Cooperation, Shenzhen Stock Exchange.

Other improvements include the addition of more than ten trading days to Stock Connect each year, eliminating issues related to the public holidays in mainland China and Hong Kong – such as northbound trading being closed on the day before a Hong Kong public holiday⁴.

“These enhancements all help to make Stock Connect the primary venue for connecting the capital markets between Hong Kong and mainland China,” said Wilfred Yiu, HKEX Co-Chief Operating Officer and Head of Equities, who added that Stock Connect now accounts for 70% international investor holdings of A-shares.

There are other ways for foreign investors to invest in the A-share market, presenting a range of accessibility options so that investors can choose the route that best fits their specific needs.

The Qualified Foreign Investor (QFI) programme is the oldest access channel. Revised in 2020 by combining its earlier iterations QFII and RQFII, it is typically used by larger institutions – such as sovereign wealth funds and asset management companies. The main attraction of QFI is its broad scope – covering the entire equities and fixed income universe, it is also the only way to access A-share IPOs and onshore commodity futures.

An alternative to direct access via Stock Connect or QFI is synthetic access. By using derivative instruments that are linked to onshore assets – such as swaps and fully-funded P-notes – offshore investors can gain exposure to the A-share market while facing a banking partner such as HSBC as their counterparty.

This route is particularly attractive to the hedge fund community, due to its flexible offering. Hedge funds have used this channel to access private placements in the primary market and blocks in the secondary markets, and funds are also able to obtain leverage via these note products.

Comprehensive coverage – onshore and offshore

Although there are several routes into the onshore market, it is critical that investors find an experienced partner with the right expertise in China. HSBC has a comprehensive solution covering all access channels – integrating execution, clearing, FX, financing and custody.

As a universal bank with a strong onshore and offshore presence, HSBC is not only able to cost-effectively meet the broad needs of large institutions that have exposure to onshore China across multiple asset classes and various channels, but also provide a bespoke solution for funds that have complex individual requirements.

HSBC: Your one-stop service partner in China

Our onshore presence includes HSBC China, which has the largest service network covering the widest geographical reach by any foreign bank in mainland China and HSBC Qianhai, the first majority-owned securities joint venture in China with one of the largest sets of investment-related licenses among foreign banks. Our presence in mainland China extends to wealth and insurance with HSBC Pinnacle Ventures⁵ and HSBC Insurance, as well as fund management with HSBC Jintrust⁶. Offshore, HSBC Hong Kong is one of the largest China market participants, arranging synthetic financing and trading, structuring, and Stock Connect services.

Taken together, these entities provide a single point of entry to onshore China that covers all access channels. “Our ‘one-stop’ service model, combined with our unparalleled position in Mainland China and Hong Kong, means that investors can enjoy market-leading support across the entire trade process,” said Irene Ho, CEO, HSBC Qianhai Securities.

“With the right partner in place, investors can rest assured that they will find the right solution to access onshore China tailored to their needs, allowing them to focus more on generating returns by executing their investment strategy,” said Selene Chong, Deputy Global Head of Equities, HBSC.