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China wants to convert SOE equity to HK listed shares

China's regulator has proposed converting equity in Chinese firms into shares listed on the Hong Kong bourse in order to raise management incentive in some state-owned firms and improve earnings, said Nicholas Yeo, head of equities for China and Hong Kong at Aberdeen Standard Investments.
China wants to convert SOE equity to HK listed shares

In 2018, Yeo remains positive on Hong Kong and China’s stocks and he highlighted a forthcoming pilot scheme that would enable mainland-incorporated companies listed in Hong Kong to convert their non-tradeable equity into (listed) H-shares.

The proposal is now under discussion between the China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission. If approved, the market will see HK$950bn ($121.5bn) worth of stocks available to trade on the Hong Kong exchange.

Yeo said stocks of these companies will be allowed to trade offshore gradually. “You may see a gradual conversion and approval, instead of flooding the shares into the Hong Kong stock market. This is not the style of the Chinese authority.”

Upon implementation, the conversion is likely to accelerate state-owned enterprise reform by providing more incentives and eventually turn into corporate earnings growth, Yeo said.

“When the shares are not tradeable, there is no reason for the major shareholders, such as local government, to care about the performance. The next step [of this proposal] is making an incentive plan of share ownership for employees at the state-owned companies.”

Separate from the conversion proposal, H-shares are favoured by DBS Bank this year because of cheaper valuations, a better regulatory environment and capital flows from mainland China. The cross-border trading links between the mainland and Hong Kong, such as Stock Connect, will support the sentiment in the Hong Kong stock market, said Jason Low, the bank’s senior investment strategist.

In China, the lasting problem of high non-performing loans level in the banking sector has improved. ASI’s Yeo expects in the near term the market will re-rate the sector, which is likely to benefit traditional and large-cap banks in China. He also is considering some smaller banks if they have stable customer savings, high customer loyalty and a well-operated retail banking business.

MSCI boost?

Yeo, who manages two Chinese equity funds, said he did not adjust the allocation of his fund based on the planned inclusion of A-shares in the MSCI emerging market index, expected this summer.

“The A-share market is increasing awareness and corporate governance. Onshore Chinese stocks (or A-shares) are fundamentally Chinese companies, with or without an inclusion into a widely-tracked MSCI index, said Yeo

Ken Peng, Citi Private Bank investment strategist for Asia-Pacific, expects the real benefit of the MSCI inclusion to be a strong boost in foreign capital inflows. “The initial stage of the inclusion will add 222 stocks of onshore China companies into the MSCI emerging market index. It will account for only 0.08% of the index composites, which is far below the 11% of A-share market capitalisation in the global equity market,” he said.


Yeo manages the Aberdeen Global Chinese Equity Fund, which invests in Chinese stocks and Singapore-listed firms, such as Jardine Strategic Holdings, according to FE. As of end of 2017, financial companies accounted for a quarter of the fund’s assets. The fund is SFC-registered and available to professional investors in Singapore. Its benchmark is the MSCI Zhong Hua.

He also manages the Aberdeen Global China A Share Equity, which primarily focuses on A-shares and tracks the benchmark MSCI China A. The fund is sold to Singapore professional investors only.


Three-year performance versus benchmark peer fund category

Source: FE, in USD

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