But, while it is likely to result in a sea change to the manner in which foreign investors interact with the Chinese market over time, it is also being viewed as an indication of China’s commitment to improving its capital markets.
As Philip Erhmann, formerly manager of the Jupiter China Fund wrote in the pages of International Adviser’s sister publication Portfolio Adviser recently, “As much as the ‘through train offers very real benefits to all investors, its real importance, in our view, may simply lie as an expression of the Beijing government’s deep-seated desire to continue to implement reforms that will bring its capital markets closer to the standard and practices found in other developed markets.“
It is also expected to pave the way for the China A Share market to be included in MSCI’s emerging market index. The index is currently under consideration for reclassification as part of the firm’s 2015 annual market classification review. According to MSCI much of the reason why it is currently not a part of the index is because of the accessibility of the market to foreign investment – something that will be alleviated by the connect progamme.
Nitesh Shah, research analyst at ETF Securities, said: “China has historically been a very closed market to investors. This announcement will substantially increase market access, allowing investors to take advantage of the growth opportunities that exist in this country. We expect that the pent-up demand for Chinese domestic equities will drive the China A-Share market higher on the opening of the Connect initiative”.
But, it is not just the reforms evident within the connect initiative that has some reconsidering their views on the region. Head of investments at Coutts, Arne Hassel, noted on Monday that the focus on China’s slowdown has been overdone.
“Emerging markets continue to be undervalued, with too much focus on a slowing China… while momentum may be easing in the region’s economic powerhouse, we believe a shift in Beijing’s growth focus from quantity to quality is desirable, providing an upbeat outlook for China itself and wider emerging markets,” he said.
Hassel added, while the group expects China’s growth to fall toward 6.7% in 2015, such a growth outlook is necessary if the country is to normalise.
“The structural reforms laid out in the Third Plenum – including population movement, reform of state-owned enterprises and financial market liberalisation – are still, in our view, the most effective way to achieve this. A tighter stance on credit growth should at least direct lending to more productive sectors of the economy, helping create better quality growth – which we see as positive for longer-term investment in Chinese assets.”
Brewin Dolphin remains somewhat more cautious pointing out in its weekly note that last weekend’s trade figures from the country continue to paint a picture of a major economy “struggling to rebalance”.
“Export growth was stronger than expected (while still slowing), import growth was less than expected. Export growth was driven by a strong US and ASEAN trade. Commodity imports were down in value but up in volume reflecting a change in mix and weaker prices. This morning China’s CPI figures for October were in line with expectations while PPI was weaker than expected. Exports to ASEAN neighbours held up well and there are no obvious effects from the devaluation of the yen.”
On Thursday China will release numbers on retail sales and industrial production and we are likely then to see a whole new host of views on the outlook for the country, but the forthcoming connect programme is definitely a positive one.
