A Foreigner’s Guide to the Chinese Exchanges

By Alex Mui ’17

UntitledSix months ago, the Chinese government lifted many of the strict regulations that prevented foreign investment in Chinese securities, and opened the Shanghai Stock Exchange to the international market for the first time. With 855 companies with a market cap at or above $1 billion, the landscape of international investments is forever changed. However, the Shanghai Stock Exchange becoming more available to international investors has actually had a few interesting effects on the global economy – some of which are allowing prudent investors to make a great deal of money.

There are three major exchanges which can be tied to China: the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the Hong Kong stock exchange. Hong Kong has long operated with greater freedom than its mainland counterparts, but its stock exchange has been irreversibly tied to the other Chinese exchanges based on the companies listed in each. These dual-listed companies are one of the most significant factors which have thrust the Hong Kong Stock Exchange into the spotlight this month.

The investment ecosystem is a bit different in China than it is in the West. A particularly striking difference is the breakdown between institutional and individual investors. Whereas in the western markets large institutional investors make up the bulk of the trading activity, the Chinese and Hong Kong exchanges are ruled by individual investors. This is significant primarily because the vast majority of Chinese individual investors have invested their assets primarily in real estate (72% of total assets for the average household), and now that opportunities to invest in equities has become available, the deluge of capital hitting the market will not only drive up stock prices, but also make the combined Chinese-Hong Kong markets the second or third largest global equity market by value straight away.

While the Shanghai Stock Exchange was tapped immediately and heavily six months ago, the Hong Kong stock exchange is just now catching up – and it’s doing so in spectacular fashion. The previously mentioned dual-listed companies were trading at an average discount of as much as 35.7%, which has drawn immense interest both within China and from the international market. Even after the market’s meteoric rise on Thursday, they are still trading at a discount averaging 23.7%. This clear opportunity along with companies riding the upswing of China’s tech-company boom (reminiscent of the dot-com bubble, in fact) and a staggering amount of capital that has not yet reached the market, could be the beginning of a true bull market in the Orient.

Sources:

http://www.wsj.com/articles/chinese-stock-buying-frenzy-sweeps-into-hong-kong-1428572234?mod=WSJ_hp_LEFTWhatsNewsCollection

http://blog.financial.thomsonreuters.com/train-examining-impact-future-shanghai-hong-kong-stock-connect/

http://www.goldmansachs.com/our-thinking/trends-in-our-business/stock-connect/report.pdf

http://fm.kuac.org/post/shanghai-stocks-are-booming-growth-bogged-down-what-gives

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