Flyttet ses som fördelaktigt för en rad börshandlade fonder, inklusive VanEck Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: PEK), VanEck Vectors ChinaAMC CSI 300 ETF (NYSEArca: CNXT), iShares MSCI China A ETF (BATS: CNYA) och db Xtrackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR). Dessa börshandlade fonder spårar kinesiska börsnoterade företag på börserna i Shanghai och Shenzhen.
”Kvoten av dollar just nu är relativt liten … men vad det gör är att det börjar en process som kommer att omfatta Kina A-aktier som en större och större del av detta mycket viktiga riktmärke över tiden”, berättade Jon Howie, chef för aktieindexstrategin vid BlackRock, för CNBCs ”Squawk Box”.
Miljarder dollar kan hjälpa till att stödja kinesiska A Shares
Investerare förväntar sig i stort sett att miljarder dollar kan hjälpa till att stödja kinesiska A-aktier framåt, eftersom globala kapitalförvaltare anpassar sina positioner för att bättre återspegla tillväxtmarknadens nya benchmarkförändringar.
Nära 230 kinesiska A-aktier dök upp på indexleverantören MSCIs tillväxtmarknads benchmark i fredags. Den delaktiga upptagningen av A-aktierna, eller yuan-denominerade aktier som handlas på fastlandsbörser, till MSCI: s allmänt observerade Emerging Markets Index kommer att ske i två faser. Den andra fasen äger rum i augusti 2018.
När A-aktierna ingår ingår Kina landsvikt i indexet, som för närvarande innehåller aktier i Hongkongs börsnoterade kinesiska aktiebolag, kommer Kinas vikt att öka till 31,3 procent. Full integration skulle medföra att A-aktier står för 16% av EM-indexet och göra att Kina svarar för 42% av referensvärdet.
iShares MSCI Emerging Markets ETF (NYSEArca: EEM), som följer benchmarket MSCI Emerging Markets Index, höll 33,1 procent av sit kapital i Kina per den 1 juni.
Is correction territory a buying opportunity for China?
Swedish and Swiss central banks go on the currency war offensive.
Defensive assets are likely to benefit from the uncertainty in Greece. The ‘No’ vote in the referendum yesterday received more than 60% of votes. Failure to make progress in debt negotiations elevates the risk of a default on the €3.5bn that is owed to the ECB on 20th July. Another default would almost certainly lead to the emergency liquidity assistance (ELA) being switched off and throw Greek banking system into an untenable position. While there is near term risk of greater volatility and downside equity risk, evidence of continued growth in the Eurozone and the US should help restore stability once the initial ‘event’ risk
Commodities
Grains post strong gains. Deteriorating growing conditions and lower acreage sown for corn and wheat saw the grains sector significantly outperform the broader commodities market. While Soybeans rode the grains momentum higher despite a record crop being planted in the US. Sugar also posted solid gains as the Indian monsoon season has begun to deteriorate. Compared to historical averages, rainfall was 14% lower than normal in June, potentially threatening the crop from the world’s second largest producer. An intensification of the El Niño could further exacerbate the disruption of crops, providing further price support. Soy is the likely exception, with an El Niño assisting growing conditions in South America. Meanwhile, the first increase in the US oil rig count has prompted crude price weakness, something that could gather momentum in the weeks ahead, if, as we expect oil production remains elevated and moves higher as rigs come back online.
Equities
Is correction territory a buying opportunity for China? Further stimulus by the People’s Bank of China last week was followed up by an easing in its crackdown on margin lending for equity market investments. The sharp slide in A-shares that the changes to margin lending rules has brought about has authorities concerned and policymakers are justifiably wary over excessive volatility and the potential threat to social stability. Policymakers are attempting to smooth the transition to market transparency and financial liberalisation and will likely continue to be supportive with fresh policy measures. The continuing Greek debt crisis prompted sharp losses across most European bourses last week and in early trading this week, as the Greek government defaulted on an IMF repayment and Greek Prime Minister continued to urge citizens to vote ‘No’ at last weekend’s referendum. Citizens duly responded, with 60% of the vote. Expect more downside risk and volatility or equity markets.
Currencies
Swedish and Swiss central banks go on the currency war offensive. Currency wars continue to be waged in the background, as the Greek crisis takes the headlines. The lack of clarity surrounding the fate of Greece has given investors no respite from currency volatility. The Swedish Riksbank cut rates further into negative territory (4th cut in 2015) and coupled with additions to its QE program, is keen to keep any currency gains in check (because long end rates remain elevated). The reason long-end rates are high is because of the lack of liquidity – a problem that larger central banks pursuing QE (the Fed, the ECB and BOJ) have not had to contend with. As a consequence, another issue is that the currency has strengthened more than expected, and hampers any benefit for the local economy. We expect the Riksbank will more closely target its currency in the future, as long as its QE program remains ineffective.
For more information contact:
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
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SH-HK Connect increases the chance of China A share inclusion
CSRC and SFC announced that the Stock Connect will start on November 17. On November 14, China’s State Administration of Taxation announced new tax rules and clarifications regarding the Connect and QFII/RQFII. While clarification is still needed on a number of issues and how smooth the program will run remain unknown, we see the Stock Connect will remove some of the major obstacles for China A shares to be included in global benchmarks such as MSCI Emerging Market (EM) index.
China has made significant progress in market liberalization
The pace of reform and market liberalization in China has been accelerating in the past 18 months. A number of key changes (MSCI roadmap, QFII/RQFII expansion, “New National Nine Rules”, SH-HK Connect, Tax Clarification) have been announced this year. The timing and magnitude of these changes exceed the expectations of many investors.
MSCI road map and timeline
MSCI included China A shares in the review list for potential inclusion to its EM index back in June 2013. The index currently includes only some of the Chinese shares listed in Hong Kong and B-shares listed in China. In March 2014, MSCI put out a roadmap for inclusion of China A shares, starting from 5% of the free float market cap. MSCI will announce its decision in June 2015. If MSCI decides to include China A shares, the first change will be implemented in May 2016. While the first inclusion may be small, it is an important milestone in opening up China’s equity market.
The Connect does not completely resolve the market accessibility issue
Currently the Connect covers Shanghai listed stocks only, not including stocks listed in ShenZhen, which excludes about one third of the A share stocks to be included in the MSCI China. The daily quota of 13 bn RMB for the northbound of the Connect, which is on a first-come-first-serve basis, may cause problem for index fund managers on the rebalance day. They often would like to trade at or near the market close to minimize tracking error. Furthermore, the current tax exemption doesn’t have time limit, and the tax for prior gains is not clear.
MSCI is likely to include China A shares in the near future
In our view, MSCI is likely to announce the inclusion of China A shares in June, to be implemented in May 2016, if the Connect runs smoothly and further extends to ShenZhen, tax issue is further clarified, daily quota is not a big hurdle, and QFII/RQFII continue to expand. In addition, the Connect may increase the initial MSCI inclusion from 5% to 10% or more. Of course this is based on a number of assumptions. MSCI’s decision will not be based on future expectations, and actual timing of the inclusion is in the discretion of MSCI index committee. Regardless, we are optimistic that in the next 2-3 years China A shares will be included in one or more major global benchmarks.
We view index inclusion as a positive catalyst to the A share market
Inclusion of China A shares in MSCI or other major benchmarks could improve the sentiment and provide significant support for the market going forward. We estimate the proposed 5% inclusion could potential attract over $8bn inflow to China A shares, while a full inclusion may lead to $140 bn inflow, which is about 30% of the free float market cap in MSCI China A index. .
Following another month of weakening data, more stimulus has been deployed. Domestic equities are likely to be the key beneficiary of this stimulus as economic growth responds.
Contrary to popular belief, reform and stimulus can and do go hand-in-hand.
An important step to address the current precarious system of local government financing was made by putting in place guidelines that allow local governments to borrow under their own name rather than through intermediaries. We believe the reform will reduce complexity and increase transparency of the financial system and thus go a long way to improve confidence in the sector.
With the completion of the Fourth Plenum meeting last week, we expect further reform to strengthen China’s institutional framework.
With financial intermediation migrating away from the shadow banking sector, the People’s Bank of China has been active in ensuring that the formal banking sector has ample liquidity by pumping in a further CNY200bn into 20 banks on top of the CNY500bn offered to the five largest banks the month before.
While most economic data has continued to weaken, a number of releases were notably better-than-expected, underscoring our view that worst seems to have been priced in. Q3 GDP growth, September industrial production and the October flash HSBC PMIs all came in above consensus expectations in sign that the subtle stimulus measures deployed in the past few months are gaining traction.
CHINA DELIVERS ON LOCAL GOVERNMENT FINANCING REFORM
As we have previously noted, China’s precarious system of local government financing needed urgent reform (see “China Macro Monitor, Is China at Risk of a Debt Crisis?”, July 2014) . On October 2nd, China delivered on that reform with the State Council providing guidelines on local government borrowing and debt management. In conjunction with its amendment to the budget law on 31st August 2014, which included a new legal framework for local governments to issue bonds directly, the reform paves the way for a more direct model of local government finance.
When local governments were prohibited from borrowing directly, they made extensive use of intermediaries called local government financing vehicles (LGFVs) which in turn borrowed from banks and trust companies. These arrangements have been unnecessarily complex and the lack of transparency has damaged confidence in the financial system. The timely reform has therefore been highly welcome.
Most of that LGFV borrowing fell under the category of shadow-banking, with even direct banks loans often taken off-balance sheet by ‘undiscounting’ bankers’ acceptances. A direct consequence of this reform will likely be a contraction in shadow banking activity – a trend we have already observed in the past quarter
A brand new paradigm
Under the guidelines set by the State Council, upper tier governments will be able issue “general obligation bonds” for social and public welfare projects that generate no revenue as well as “special purpose bonds” for projects that generate some revenues but not enough to be self-financing. Upper tier governments will be able to borrow to lend onto lower tier governments and to refinance maturing debt.
Additional requirements for disclosure will enhance transparency, which we believe is a key feature for boosting market confidence. The State Council set quotas on upper tier government borrowing and the Ministry of Finance will vet the subsequent on-lending to lower level governments, consolidating debt control measures.
PBoC remains active in driving liquidity into the financial system
With financial intermediation progressively shifting away from the shadow banking sector, the central bank has been keen to ensure ample liquidity has been maintained in the banking sector. This month the PBoC pumped CNY200bn into a broader range of 20 banks over and above the CNY500bn offered last month to the five largest banks.
As can be seen from the chart on page 1, growth in banking sector loans has also been negative and capital market financing has not been able to compensate for the shortfall in both areas. That underscores the PBoC’s urgency in making sure financing does not falter.
The central bank’s measures also will help address some of the weakness in the real economy as the government firmly maintains its target for 7-8% GDP growth this year.
In a bid to help the ailing housing market set free from a self-fulfilling negative spiral mortgage interest rates and downpayment levels were cut for some borrowers.
14-day repo rates were cut further to 3.4% from 3.5% in October further to the 20bps cut made in September.
FOURTH PLENUM SETS THE SCENE FOR FURTHER REFORM
The landmark Fourth Plenary Session of the Communist Party of China (CPC) Central Committee meeting last week placed the rule of law on the centre stage. The meeting underscored how serious the CPC is about the reforming institutions to deliver better results. A key development will be separate executive and judicial systems, in a move aimed to unencumber the system from corruption that has previously led to inefficient outcomes and delayed the implementation of decisions made by the central government.
We expect reform to continue to be implemented and economic stimulus will help the process of transition.
NEARING THE BOTTOM?
While GDP growth decelerated to 7.3% y-o-y in Q3 2014, it proved to be better than expected. More timely, industrial production data for September grew 8.0% y-o-y, rebounding from a five-year low of 6.9% y-o-y set in August. The flash October HSBC manufacturing PMI also came in higher than expected at 50.4 compared to 50.2 in September. While many other data points remain weak, the industrial data could mark a turning point as stimulus activity gains traction (for a summary of recent policy easing refer to table on page 10).
CHINA A-SHARES TEMPORARILY DIP AS SHANGHAI-HONG KONG CONNECT DELAYED
The Shanghai-Hong Kong Connect has been delayed, helping push the China A-Share market down 3.8% since its recent peak hit on 9th October (however the index is still up 10.6% in the past six months).
It appears that temporary factors have been behind the delay, though no definite time for implementation has yet been given.
State media reports imply that the reason for the delay is the pro-democracy protests in Hong Kong. There is also some speculation that Northbound brokers have requested more time for implementation. All indications point to the testing of the link having been successful, indicating there are no technical blockages to implementation.
In our view the implementation of the program is a matter of when not if, as there are no structural reasons for the delay and it is in the interests of the mainland China government and policy-makers to open up the domestic stock market to foreign investment and mainland flows into the Hong Kong stock exchange.
Therefore, we view the recent correction as a good opportunity for investors who missed the China A-Share rally between July and the beginning of October, to build positions.
For a more detailed overview of the Shanghai-Hong Kong Connect see “Shanghai-Hong Kong Stock Connect: A Boost For China A-Shares”
Although the premium of H-Shares over A-Shares had disappeared temporarily earlier this month, the premium has re-emerged. That opens opportunities to benefit from future arbitrage.
We believe that the recent pull-back in the China A-Share index will be regained on the opening of the Connect as Northbound flows accelerate. Furthermore, ratcheting up of stimulus by the government and central bank will help continue the positive momentum that has dominated the China A-Share index during the second half of this year.
For more information contact:
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
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The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.
This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.
ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.
MSCI Annual Market Classification Review . MSCI announced today that China A-shares will not be included in the MSCI Emerging Markets Index as part of the 2014 Annual Market Classification Review, but will remain on the review list as part of the 2015 Review.
This is one of the three potential outcomes (option three) we pointed out in our recent report “Including China A shares in MSCI EM index: is it the time?”. As we explained in that report, while China has made significant progress in opening up its capital market, the three obstacles still exist and no major progress has been made.
We notice that there have been promises that some of these issues will be resolved soon (at least partially), but MSCI’s decision may not be based on the expectation of the future developments. In addition, based on our conversations with fund managers, they still feel it is quite difficult to manage funds including China A shares. Postponing the decision to next annual market classification review in 2015 will give China more time to further open up, which will bolster the case for MSCI inclusion. This will also give enough time for MSCI and the investment community to fully analyze the situation, and prepare for the inclusion.
On the other hand, MSCI acknowledged that “the A share market is effectively opening as we speak” because many investors are already investing in the China A-shares and the quota granted has increased significantly. MSCI also highlighted further regulatory reforms and other changes expected in the near term, such as implementation of the Shanghai/Hong Kong Stock Connect program (expected in October 2014). Therefore, we believe an off-cycle review (for example in December 2014) is still possible (the option two in the report mentioned above).
In addition, MSCI will introduce by June 27, 2014, the MSCI China A International Index as a standalone index. This index and its regional and global combinations can be used as benchmarks by QFII and RQFII investors to complement the already extensive series of MSCI China A Indexes.
MSCI also announced that it will not promote Korea and Taiwan to Developed Markets index. This is consistent with what we expected in our earlier report. Furthermore, MSCI will remove these two countries from the review list for potential reclassification for 2015, due to the absence of significant improvements in key accessibility areas for the past few years. Both countries may be added back to the review list as soon as there will be meaningful improvements.
