Van Eck Outlook: Shanghai-Hong Kong Stock Connect
TOM BUTCHER: Welcome to Van Eck Outlook. I'm your host, Tom Butcher. I'm here with CEO Jan van Eck, who is going to tell us about an exciting new development in the Chinese financial market. Jan, would you please tell me about Shanghai-Hong Kong Stock Connect and how it will help investors?
JAN VAN ECK: We think this is undoubtedly one of the most important events for investors in 2014. What the Connect does is connect the stock markets of Hong Kong and China. The impact is that 80% or so of the market cap of locally-listed Chinese stocks, A-shares, are now available to you or any institution with a Hong Kong brokerage account. There is a limit on how much money can go, what is called, "northbound" on any given day, and it's relatively small. However, the fact that much of the local equity market is now available to international investors has long-term implications, which are as follows: Almost every investor has an allocation to emerging markets or global equities in one size or another in their portfolios, and with this development, China has clearly signaled that it is going to be open to non-Chinese investors; China will be included in emerging markets indices within the next two or three years, which many people expect, and which means China will be in your portfolio, even if you do nothing.
BUTCHER: Thank you. That sounds fairly all encompassing. Does Stock Connect actually have any limitations?
VAN ECK: Yes. Not all equities are included. You need to have a Hong Kong brokerage account and, as I said, only a certain amount of money can enter on a given day. It's still an important step in a multi-decade process of China gradually opening up its capital account to the rest of the world, making the Renminbi an international currency for trade as well as finance, and allowing both China’s stock market and its bond markets to be accessible to non-Chinese investors.
Because Stock Connect is not an all-encompassing program, there are still opportunities within the Chinese markets that you can access outside of Stock Connect. There are two that we focus on. One is mid-cap stocks. We have an ETF, symbol CNXT, "ChiNext," comprising mid-caps or small- to medium-sized companies that are generally privately run and held, meaning not state-owned enterprises, for the most part. We think those are really exciting. They're a little bit more expensive — they trade at 30 times earnings — but they make up an interesting part of the market that has performed quite differently from large caps. The second part of the market that's not available through this program is bond markets or the fixed-income markets. China has the third largest fixed-income market in the world at $5 trillion. We have a new ETF, symbol CBON, which is a diversified play into those fixed-income markets and contains governments, government agencies, and corporate debt. The new Stock Connect program is exciting, there are other opportunities in the market that require an ETF or another kind of fund vehicle to gain exposure.
BUTCHER: Jan, if that's the longer view, what are the shorter-term impacts on the market?
VAN ECK: Since this was announced in mid-November, the large caps in China have rallied relative to some of the smaller companies that are going to be part of the program. Therefore, the arbitrage between Shanghai and Hong Kong may no longer exist, and this has given a little bit of a boost to the local A-share large caps that are in an ETF such as PEK, for example, which tracks the largest 300 companies in China. That is only a short-term impact. I think the longer-term question or the medium-term question is about profitability. The large caps are only trading at 11 times earnings; they're some of the cheapest stocks in the world. People have been concerned about Chinese economic growth, and they're also, I think, punishing some of these companies because large government stakeholders are involved in these companies. This raises the question of whether these large-cap companies are focused on profits. If people take a step back, they will see that Chinese companies are growing profits at 10% a year, i.e., at double digit rates. At some point 11 times earnings becomes attractive, but one never knows when that will be. People have been waiting given that Chinese equities have been in a bear market for many years until this year. That presents an interesting opportunity and we're seeing some investor interest.
BUTCHER: Jan, with those exciting new options open to investors who want to participate in the mainland Chinese financial market, we come to the end of this special edition of Van Eck Outlook.
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Market Vectors ChinaAMC A-Share ETF (Ticker: PEK) may gain exposure to the China A-Share market by directly investing in China A-Shares and investing in swaps that are linked to the performance of China A-Shares. An investment in the Fund involves a significant degree of risk, including, but not limited to, the Adviser’s and Sub-adviser’s ability to manage the Fund, which depends upon the availability of China A-Shares and the willingness of swap counterparties to engage in swaps linked to the performance of China A-shares. The Fund may invest in swaps and derivatives which entail certain risks, including limited availability of swaps, counterparty risk, liquidity risk, risks of A-shares and the RQFII system, tax risk (including short-term capital gains and/or ordinary income), and currency risk. The Fund may also invest in shares of other funds and absorb duplicate levels of fees with respect to these investments.
The Fund is subject to elevated risks associated with investments in securities of Chinese securities, including A-Shares, which include, among others, political and economic instability, inflation, confiscatory taxation, nationalization, and expropriation, market volatility, less reliable financial information, differences in accounting, auditing, and financial standards and requirements, and uncertainty of implementation of Chinese law. In addition, the Fund is also subject to liquidity and valuation risks, currency risk, non-diversification risk, and other risks associated with foreign and emerging markets investments.
Market Vectors ChinaAMC SME-ChiNext ETF (Ticker: CNXT) is subject to risks which include, among others, those associated with investments in Chinese securities, particularly A-Shares, adviser and sub-adviser risk, risk of the RQFII regime, political and economic instability, inflation, confiscatory taxation, nationalization, expropriation, and market volatility, all of which may adversely affect the Fund. Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, changes in currency exchange rates, unstable governments, and limited trading capacity which may make these investments volatile in price or difficult to trade. Small and medium-capitalization companies may be subject to elevated risks. The Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
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