As predicted in July, the Chinese regulators will now allow Chinese investors to open accounts at Bank of China and trade securities listed in Hong Kong, whose markets, unlike the mainland’s, are integrated with the global economy.
Major beneficiaries of this change will be Chinese and Hong ETFs which contain H shares which are Chinese companies which are listed on the Hong Kong Stock Exchange. The most popular are the iShares Hong Kong ETF (NYSEARCA:EWH) which now contains about 40% H shares and the iShares China ETF (NYSEARCA:FXI) which has H shares as almost all of its 30 positions. Another choice is the SPDR S&P China ETF (NYSEARCA:GXC) which has a broader exposure to the China market.
China’s State Administration of Foreign Exchange (Safe) also said these investments, under a pilot scheme, would be exempt from a $50,000 limit on the foreign currency Chinese citizens can buy or sell every year. The lifting of this cap is crucial for this policy change to have a significant impact on markets.
The vast majority of Chinese savings is now parked in bank accounts with negative real interest rates and it is likely that at least some of this cash will take advantage of this relaxation of controls especially since Hong Kong shares trade at an attractive discount to mainland markets. China's central bank also raised its benchmark 1-year lending rate by 18 bp to 7.02% from 6.84%, which was the fourth rate hike this year. The 1-year deposit rate was raised by 27 bp to 3.60% from 3.33%.
The Financial Times predicted that investors are expected to focus on Chinese companies, which trade at an average 50 per cent discount to the mainland. Once it secures final approval from the China Banking Regulatory Commission, the new policy is likely to be expanded to other intermediaries such as banks as well as other offshore stock markets.