While most of the attention has focused on investment into China, capital coming out of China is likely to be the more important story, a report published by Credit Suisse’s Asia Pacific Equity Research team forecasts.
Entitled «Harnessing Southbound Sentiment,» the research is part of a series that explores the implications of China’s capital markets liberalization program. It is presented at the 7th Credit Suisse China A-Shares Conference, a three-day virtual conference concluding this Wednesday.
While most of the attention has focused on investment into China, capital coming out of China is likely to be the more important story, explained Will Stephens, Head of Quantitative and Systematic Strategy, Asia Pacific, at Credit Suisse, and the author of the report.
Key Question For Global Asset Prices
«Studying the trends of Southbound investors can provide significant insights into what to expect as China further liberalizes its capital account, as well as create an attractive opportunity to boost alpha generation in Hong Kong,» he said. «The opening up of China's capital markets will represent a long-term structural shift for international capital flows,» Stephens added.
Commenting on the scale of the opportunity, he said: «China saves 47 percent of GDP and has CNY 89 trillion ($ 12.6 trillion) of household savings to deploy; how Chinese households invest their savings will be one of the key long-term questions for global asset prices as liberalization accelerates.»
Fueling Massive Onshore Liquidity
Currently, this QE-sized wall of capital is largely confined within China, fueling massive onshore liquidity. As restrictions ease, the resulting outflows will have a similarly outsized impact. The first testing ground of this trend is the Stock Connect program, which facilitates cross-border capital flows between the Hong Kong and Chinese stock markets.
The Southbound flows from domestic Chinese investors have re-ignited liquidity in Hong Kong and are now the key marginal driver of stock prices, Mr. Stephens noted.
Why Southbound Flows Matter to Hong Kong
Southbound investors now hold more than $160 billion of Hong Kong-listed stocks and are among the top holders of the individual stocks in which they are active, including many of the largest companies listed in Hong Kong. In terms of turnover, Southbound investors have accounted for 20 to 25 percent of gross turnover year to date, representing the highest levels seen since the Stock Connect program was launched in late 2014.
Their impact has steadily increased since the launch of the program, a trend that Stephens expects to continue given the scale of Chinese capital relative to Hong Kong liquidity. Utilizing machine learning techniques and the unique Credit Suisse Southbound Sentiment Strategy, the team helps investors to identify the most informative Southbound trends and how they forecast future stock-level alpha.
Broad Research Coverage Capabilities
Credit Suisse has one of the most comprehensive and highly recognized China Research coverage capabilities. The Credit Suisse Equity Research team covers more than 430 Chinese-listed stocks, including about 180 domestic A-shares, which represent over 70 percent of the CSI-300 index constituents by market capitalization.
In addition, the HOLT platform covers close to 2,000 A-share companies and more than 3,000 stocks across Hong Kong and mainland China.