Plans to allow greater foreign investment in Shanghai's A-share market could prove to be a game changer for investment in Chinese shares, analysts say.
A scheme called the Shanghai-Hong Kong stock connect, announced earlier this year and due to be formally launched in October, will allow foreign investors to place buy or sell orders on Shanghai's A-share market through brokers in Hong Kong. Chinese investors meanwhile will be able to use mainland brokers invest in Hong Kong's H-share market.
"So far it is relatively difficult for international investors to get access to Chinese A-shares and with this connect scheme, we will have an additional 550 billion renminbi ($88.6 billion) on top of existing [investment] allocations, so there is more money going into this space," said Francois Perrin, head of greater China equities at BNP Paribas Investment Partners.
Under current regulations, foreigners have only limited access to China's A-share market – basically the shares of mainland Chinese firms listed in Shanghai or Shenzen.
The big investors in this market are domestic investors with foreign investors granted limited access through programs or pilot schemes such as the QFII (Qualified Foreign Institutional Investor) designed to open up Chinese markets.
According Citibank, foreign investors make up about 1 percent of the turnover in the Chinese A-share market while domestic retail investors account for about 80 percent.
In a June report Citibank said one long-term implication of the Shanghai-Hong Kong stock connect scheme would be to "improve A-share market fundamentals and efficiency with a more balanced investor base; A-shares may be added to global indexes (for example the MSCI Emerging Market stock index) which would result in substantial liquidity flow into the A-share market."