| HONG KONG
HONG KONG Aug 21 Stocks in Hong Kong and
China's bourses have rallied ahead of a deadline to put down an
investment pipe between the two markets, but issues around
capital gains tax still remain to be cleared.
The landmark stock-connect scheme between Shanghai and Hong
Kong - another step in China's efforts to open up its markets -
is set to launch in October and regulators and market
participants are racing around the clock to test mechanisms to
ensure market readiness.
While China's investors are anticipating a wave of
institutional money will flow into the mainland's relatively
undervalued markets, Hong Kong's stock punters are hoping
Chinese money will boost trading volume and lift stocks.
The Shanghai Composite Index rose to eight-month
highs this week, and Hong Kong's Hang Seng Index also
jumped to more than six-year highs, in a catch-up to strong
"The Shanghai-Hong Kong stock connect scheme is the catalyst
of the recent market rally, and risk-on sentiment globally amid
ample liquidity also helps," said Ben Kwong, chief operating
officer at securities firm KGI Asia.
Both markets underperformed global markets for the past year
and valuations are low compared with other markets, enticing
some investors to switch their asset allocations now, Kwong
Despite the recent rally, the price-to-earnings multiple of
China's stock market remains well below a 10-year median
indicating the extent of the undervaluation of the markets.
The demand to purchase shares have seen available quotas
under China's existing dual schemes becoming scarce in recent
weeks with the gap between mainland listed A-shares and Hong
Kong listed H-shares of Chinese companies narrowing.
ETFs under an investment scheme in the Chinese currency
recorded net inflows of 8.2 billion yuan ($1.33 billion) in
July, the highest since December 2012 and nearly doubling from
June, according to Morningstar data.
While market participants are bullish on the prospects of
the success of such a scheme, issues such as taxes in both these
markets have yet to be resolved making some investors wary about
rushing headlong when the scheme launches.
"We haven't got any clarity on the tax issue yet from the
regulators but we hope it will be resolved by the time the stock
connect scheme launches," said Lilian Leung, a fund manager at
JP Morgan's A-share Opportunities Fund earlier this week.
It also remains to be seen how flows will affect yuan
liquidity in the offshore market, though it is widely believed
that it will become more volatile given that settlement for the
scheme will be in Chinese currency.
Under the requirements, mainland investors who buy Hong Kong
shares will convert their RMB in the offshore market, while
overseas investors will need to obtain their yuan funding in the
former British colony before they invest in China.
The launch of the long-awaited programme has entered the
final stage with both exchanges busy testing their systems.
The Hong Kong Stock Exchange said it would kick off its
first connectivity test on Saturday with several rounds of
market rehearsals to follow in the coming weekends.
Its Shanghai counterpart already started tests last week
with the first batch of 25 local brokers trading 14 selected
shares listed in Hong Kong, as reported by Chinese media.
WEEK IN REVIEW:
* JP Morgan announced on Monday the launch of China A-share
opportunity fund, the first SFC-authorised and actively managed
Renminbi Qualified Foreign Institutional Investor (RQFII). The
fund will allocate at least 70 percent of the portfolio to
* Long positions in the Chinese yuan hit a near seven-month
high as investors piled up long positions on the currency amid
signs of stabilisation in the Chinese economy, but sentiment on
most emerging Asian currencies slightly deteriorated in the last
two weeks, a Reuters poll showed.
* Taiwan's yuan deposits rose to 293 billion yuan by the end
of July, up 0.9 percent from a month earlier, statistics from
the island's central bank showed.
* DBS Bank said it had extended a cross-border yuan loan
worth 150 million yuan to S.F. Group based in the Qianhai
Shenzhen-Hong Kong Service Industry Cooperation Zone.
CHART OF THE WEEK:
China's A-shares are still trading at discounts compared to
their counterparts in Hong Kong, but the spreads are narrowing
as investors bet on a convergence of dual-listed shares with a
stock connect scheme set to be launched in October: bit.ly/1tpQhmN
CNH Tracker-South Korea's yuan business sees strong growth
despite FX volatility
Inflows to Hong Kong ETFs soar as foreigners bet on Chinese
Central bank and traders briefly see eye-to-eye on yuan
More stories about the CNH market
Daily onshore yuan reports
Daily China money market reports
Offshore yuan rate Onshore yuan rate
Offshore yuan dealt Onshore yuan on CFETS
THOMSON REUTERS SPEED GUIDES
(Editing by Jacqueline Wong)