Investing in China | D-Shares
As China’s economy continues to grow significantly with a better than expected GDP of 6.5% in 2017 coupled with MSCI’s inclusion of China A shares in their Global Emerging Indices beginning in the summer of 2018, foreign investors will continue to explore the various ways to express their investment decisions in respect to exposure to China. Direct investment in the China domestic equity market can be accessed via Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) quotas and Stock Connect via the Hong Kong Stock Exchange. All three channels have been up and running for some time with the quota system for long term committed investors with some success. These are long term due to the rules surrounding the application and granting of such quotas. Further, Stock Connect trading volume has been relatively high since its launch in 2015. Initially, Stock Connect covered Shanghai listed stocks and since last year this was extended to include Shenzhen listed stocks, thus giving many foreign investors direct access to China A shares with very few or no restrictions. In addition, investors have traditionally been investing in Chinese companies listed on international exchanges like H shares on the Hong Kong Stock Exchange, S chips on the Singapore Stock Exchange and a number of tech companies like Alibaba and Tencent on NASDAQ. It is expected that next year, there will be another avenue to invest in China: D Share Market. This new product is being developed by China Europe International Exchange (CEINEX), a joint venture formed by the Shanghai Stock Exchange, Deutsche Börse AG, and the China Financial Futures Exchange in 2015. CEINEX is the first dedicated trading venue for China and RMB investment products in international markets. The internationalisation of the Renminbi (RMB) has been the goal of the Chinese Central Government since RMB joined the IMF’s special drawing rights basket of reserved currencies in late 2016. It is imperative that there are international markets where trading of financial products in RMB is freely available to investors to provide sufficient primary and secondary liquidity. This is where CEINEX has an important role to play by offering foreign investors products that invest in China and are denominated in RMB. Since its inception in 2015, CEINEX has listed a number of ETFs, some crossed listed on other exchanges, 65 bonds and 1 ETF future instrument and plans for an option on this instrument. PRC incorporated companies seeking access and exposure to European capital markets and international investors will be able to list on CEINEX by 2018 as D shares. It is envisaged that due to time zone advantage, European investors will find D shares trading efficient. Nonetheless, it is equally important that the ecosystem of brokers, market makers and settlement agents be able to support the development of D shares in order to ensure that sufficient liquidity prevails to make this new product a success. It took over 20 years for H shares to gain both scale and trading volumes. S chips has been less successful. So let’s watch this upcoming development. If nothing else, it will provide investors with more choice and that is always good.