Market Beats

The Beauty in the Eyes of Foreign Capital Beholders

MioTech Team 2019-02-26

In this report, we investigate A-share investment opportunities amid the opening of the Chinese financial market.

Despite the bleak outcomes of trade impacts on Chinese economic growth, currency and stock exchange, China’s stance on foreign investment has only grown increasingly open, further widening its capital markets to a broader set of foreign investors.


On top of slashing foreign investors stake control on broker and insurance companies, this year, China doubled the limit of one of the main foreign investment channels, the Qualified Foreign Institutional Investors program, or the QFII. In statement made in 14th of January, the quota for the QFII was increased to US$300 billion, the first expansion since 2013. About two thirds or USD$101 billion is used by overseas institutions.


Further enabling the integration of Chinese stocks into the global financial system, the MSCI in June 2018 included more than 200 Chinese mainland-listed companies in its flagship Emerging Markets index for the first time. As a result of this historic inclusion into a flagship benchmark, MSCI estimates that an US$22 billion will flow into the Chinese A-shares from both passive and active funds. Combined with the relaxation in QFII quotas and the significant A-share inclusion, this marks a milestone in the opening of China’s equity market to international investors.


“MSCI estimates that an US$22 billion will flow into the Chinese A-shares from both passive and active funds.”


In light of the opening of China’s financial market, let’s take a look at the two key channels for foreign investors entering the A-share market to understand their investment logic, in order to seek investment opportunities amid China financial market open.


Currently, foreign investors are not free to directly invest in A-share. In general, they have to go through either the Qualified Foreign Institutional Investors (QFII) or the Stock Connect to enter A-share market.


Source: Company Report


Looking specifically at QFII, since 2003, the granted investment quota has been rising, with growth further accelerating after 2012, reaching USD$101.3 billion by the end of January 2019.

In total, the State Administration of Foreign Exchange, China’s foreign exchange regulator has granted investments to a total of 287 foreign institutions by end of 2018. It is important to note that the increasing QFII investment only took less than 1.5% of the total market cap of A-share as of 18 Feb 2019.


Source: Company Report


In regards to the Northbound Stock Connect, the accumulated northbound net buy was USD$110.3 billion as of 18 February 2019, similar to the granted QFII investment quota. The net buy represented 1.5% of total A-share market cap. Taking into perspective both Stock Connect and QFII together, approximately 3% of A-share market cap was held by foreign investors. Given the similar investment size, the average ticket size for the QFII investors was significantly higher than the stock connect. It might imply the stock connect investors tends to be mass market participants (retail investors).


Source: Company Report


When looking at investor holdings by sector, by and large both QFII and Northbound Stock Connect portfolios were quite close in distribution. With the exception of IT which investors in Stock Connect preferred more. Industrial and Consumer Discretionary were the leading sectors that both QFII and Northbound Stock Connect investors preferred the most by 3Q18, in terms of the number of invested companies. This is supported by comparative pricings in industrial products and Chinese consumption upgrade respectively. On the other hand, Energy, Utilities and Property was the least popular sector across both channels, with less than 10 companies receiving QFII foreign investment.


To find out more on foreign stake trajectories, patterns in foreign capital behaviors and trade war impacts on both channel holdings by sector, download our report below.

Download the A-Share Opportunity Report

Get a free deep dive into A-share investment opportunities amid the opening of the Chinese financial market.

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