International investors have a new path for gaining access to China’s sizzling technology sector.
Starting on Monday, 12 stocks listed on Shanghai’s tech-focused Star Market become available to foreign investors through the Hong Kong Stock Exchange’s Stock Connect program, which allows investors in mainland China and Hong Kong to buy shares in each other’s market.
The addition of Star Market stocks to Stock Connect is part of China’s liberalization of its financial markets to encourage greater participation from global investors. Since its launch in July 2019, Star has seen some of China’s most aggressive market sentiment, and foreign investors have been eager to get a piece of the action.
With the new changes, global institutional investors can for the first time invest in mainland-listed shares of new-economy companies out of Hong Kong through Stock Connect, which has been the most preferred route for money managers.
Previously, foreign investors only could invest in Star Market stocks through the Qualified Foreign Institutional Investor channel, which allowed institutional investors to buy and sell yuan-denominated A-shares after obtaining a license from the China Securities Regulatory Commission. Up to the end of 2019, such investing was subject to quotas.
The inclusion of the stocks in the Stock Connect program also the paves the way for inclusion in global indexes, which in turn could attract passive investors. Inclusion in Stock Connect is a prerequisite for A-shares to be included in international indexes, such as those of MSCI and FTSE Russell.
The amount of foreign investment in the Star Market surged from RMB 270 million (USD 42 million) at the end of 2019 to RMB 5.64 billion at the end of November 2020, according to China Renaissance Securities.
Meanwhile, global investors have bought USD 175 billion worth of yuan-denominated A-shares through Stock Connect since 2015, data compiled by Societe Generale shows. Half of the inflows have come in the past two years.
Only Star stocks included on the Shanghai Stock Exchange’s SSE 180 Index and the SSE 380 Index or dual-listed in Hong Kong are available under Stock Connect. The 12 companies include China Railway Signal & Communication and Anji Microelectronics Technology but exclude a number of Star-only listed companies more familiar to global investors, such as chipmaker Cambricon Technologies.
“The inclusion of eligible Star Market-listed A-shares for northbound trading [under Stock Connect] will expand global investors’ exposure to Chinese securities and especially to A-shares’ high-growth new-economy sectors,” said Bruce Pang, the head of macro and strategy research at China Renaissance Securities in Hong Kong. “It will also help to facilitate and accelerate Star Market-listed A-shares’ inclusion in major global equity indexes.”
Modeled after the tech-heavy Nasdaq, the Star Market is home to more than 200 stocks in the science and high-tech sectors, representing Shanghai’s fastest-growing stock market and featuring a simpler listing process and freer stock movements than the country’s older share boards.
CanSino Biologics, another of the 12 companies, might not profitable, but it still was able to list under the more flexible regulatory system that recognized the company’s market potential. CanSino is one of the five Chinese COVID-19 vaccine makers that are involved in late-stage clinical trials.
“With the inclusion of Star board in the northbound and further expansion of southbound Stock Connect trading, this will allow a further convergence of fundamental research views and valuation considerations for Chinese equities overall,” said Ma Wendy Liu, the head of China strategy at UBS Global Research.
The move comes on the heels of last Wednesday’s listing of an exchange-traded fund tracking the Star Market 50 Index on the New York Stock Exchange by Krane Funds Advisors. The KraneShares SSE Star Market 50 Index ETF closed Friday at $24.36, down 1.7%.
“We believe [the ETF] represents companies that are China’s future leaders across industries powering the growth engine of China for decades to come,” Jonathan Krane, CEO of KraneShares, said in a statement.
The new developments come as investors in mainland China show immense hunger for Hong Kong shares through Stock Connect, snapping up Tencent Holdings, China Mobile, Xiaomi, and other tech companies, making the benchmark Hang Seng Index one of the best-performing major global indexes so far this year.