Shanghai and Hong Kong hit new highs, but Chinese investors still stick to what they know

Written by Denis Suslov || April 09 2015

Chinese investors continue to join the market rally at an unprecedented pace. Records were broken as 1.6 million accounts were opened from March 23rd and March 27th and only slightly less in the following week – 1.5 million...more than the population of a small city..., well a small city outside of China.

China new stock accountsAn unexpected effect of the local rally is the spillover of some trading to the Stock Connect program. Southbound trading used up all of the RMB10.5 billion daily quota on the April 8th, the first time in six months since the launch of the program in November 2014.

However, it seems like Chinese investors are trading same companies as they do at home and are not really interested in more than one thousand non-Mainland companies traded on the HKEx. In fact, in March 2015 there were no Hong Kong based companies among the Top 10 most actively traded stocks.

Clearly there is a south-bound interest in 1. finding value and 2. arbitrage. 

Firstly, the mainland market has nearly doubled in the past year without really showing the fundamentals to justify the move. This has pushed mainland valuations through the roof. Investors looking for value are turning to dual-listed shares in Hong Kong whose valuations have risen, but are still less than the mainland. 

Secondly, there has always been a price differential between mainland and Hong Kong dual-listed stocks, mainly because cross-border investment options have been limited. As these relax, one could assume that these differentials will shrink and potentially disappear. Many investors are pouring into the arbitrage opportunity. 

Staying Close to Home

However, all of these dual-listed stocks are Chinese companies. One of the questions considered by investment managers and global CFOs is this: will Chinese investors ever become interested in foreign stocks? Surely if valuations are too high in China, an investor might look for a more rationally priced market?

We think it will take them time to do so. Of course, institutional investors with teams of professional analysts devoted to global research will have an advantage to when looking for diversification and growth opportunities across all markets. But among individual investors the understanding of and interest in foreign stocks is still lagging. 

As news media serves to the tastes of its audience, TV/web coverage is a good indicator of what investors are interested in. If you follow Chinese main stock trading and market data portals, you know that locally-listed shares receive the most attention. What is interesting is that coverage of Hong Kong or US listed companies is mainly focused on “China concept stocks” – stocks of offshore-listed Mainland companies. In other words, when thinking to invest overseas, Chinese investors will think of China-based companies first, which is good for them since they understand these companies well, but not so good from the portfolio diversification point of view.

Where to next?

In case Shanghai-New York Stock Connect is announced next year or investment flow restrictions are completely eliminated, the Mainland investors might put some of their savings in companies whose products they have been buying for a long time now – Apple, Coca-Cola, even 3M. But the volume will likely be smaller than the portfolio theory suggests, at least in the near future.

As the middle class continues to expand, and education levels grow, more individual investors will be interested in foreign shares. With China relaxing its outbound restrictions, opportunities arise for those well-positioned to advise and share insight on international stocks.