The Stock Markets in China will Change Forever

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Few outside of China — mainly just institutional investors with approved quotas — are able to buy what’s sold in Shanghai, Shenzhen and the other mainland Chinese bourses, while any investor in the world can buy Hong Kong-listed names. But this is all about to change in a big way, when China launches its game-changing “Shanghai-Hong Kong Stock Connect” program. For the first time ever, retail investors around the world will be able to invest in mainland Chinese equities.

In some high-profile cases, the same companies have stock listing in both Shanghai (known as “A-shares” when denominated in yuan) and Hong Kong (“H-shares”), though here too, opportunities exist in the form of arbitrage, as a given company’s A-shares and H-shares rarely trade at the same level. “Many international investors are completely excited,” said Charles Li, the chief executive of bourse operator Hong Kong Exchanges & Clearing.

“This is probably the last frontier market that has yet to open,” Li said, “and they [global investors] probably have never seen a rebalancing possibility like this scale anytime in past history.” As the head of Hong Kong’s stock exchange, such excitement is clearly in Li’s interest, but he’s not the only one who sees the Stock Connect as a sea change for global stocks. Goldman Sachs, for instance, said in a recent note that the opening of Shanghai to foreign investors is an opportunity “simply too big to ignore.”

“The scheme essentially … creates the world’s second-largest equity market by market cap,” second only to the New York Stock Exchange, Goldman Sachs said. In cash-trading terms, the new China mega-bourse would come third globally, behind the NYSE and NASDAQ. The Goldman Sachs analysis notes that the Stock Connect could eventually “add 855 companies with over $1 billion of listed market cap to the investable universe, assuming full liberalization” in which foreign investors can buy all A-shares listed not just in Shanghai, but also on the Shenzhen exchange as well.