China ‘Through-Train’ Ends Double Taxation For Equity Investors
The Shanghai-Hong Kong Stock Exchange Connected is working out its kinks and investors are taking notice. Hong Kong and Beijing signed a tax treaty on Thursday that ends double taxation for equity traders, which was one of the sticking points for local brokers hoping to buy into China’s massive mainland equity market.
Hong Kong-based investors will no longer be taxed twice on capital gains from trading mainland-listed stocks thanks to an amendment to Hong Kong’s double taxation treaty with Beijing today. Local fund managers and brokers said the newly signed changes to the tax treaty will boost passenger flow on the H-shares to A-shares “through-train”. This is yet another step forward in making this Shanghai listed corporate stock affordable to foreign investors. The scheme has gotten off to a slow start as investment firms and broker-dealers in Hong Kong learn the system.
Late last month, Morgan Stanley said it was hiring around a dozen new equity analyst to start digging for gold in corporate stocks listed on the Shanghai Stock Exchange. Until the so-called through-train get going, foreigners did not have full access to mainland listed shares.
China investors believe that the A-shares will grow in popularity and eventually become part of foreign institutional portfolios. Today, large endowments and pension funds all invest in Chinese equities. But the stocks they are buying are all listed on the Hong Kong exchange, priced in Hong Kong dollars. With the new exchange connection, more foreign mutual funds can start including A-shares in their portfolios, or design portfolios restricted to Chinese mainland equity.
This opens up a boatload of opportunities for investment firms, both Chinese and non-Chinese, who can create entirely new China fund products investing in everything from small caps to sector funds.
For now, one of the only ways into liquid A-shares trading is through the Deutsche Bank X-Trackers China CSI 300 (ASHR) exchange traded fund. The ETF only invests in mainland stocks, priced in the local currency. The fund is up over 73% since it launched in 2013, one of the first in the market.
In theory, the opening of the A-shares market to foreign investors means more demand for Chinese equities which means higher prices for stocks, and higher returns for early entrants.
“It’s a massive market,” says Alex Wolf, an economist with Standard Life Investments in the U.K.
Shenzhen’s stock exchange is supposed to be part of the through-train at some point, as well.
State Street Bank is launching an A-shares ETF at some point in the near future. State Street is the Godfather of the ETF, and runs the biggest names in the market — the SPDR S&P 500 and the SPDR Gold ETF.
China’s A-shares raised altogether 724.9 billion yuan ($118.19 billion) in 2014, according to the China Securities Regulatory Commission. It said back in February that 47.1 billion yuan was raised through IPOs of 94 companies, and 677.8 billion yuan from the refunding of 609 listed companies.
