One-on-One interview Chinese Equities Implications of property easing and relaxation of investment rules Mandy Chan Head of China and HK Equities March 2015 "The reduction in down-payment for second home mortgages, changes to property transaction tax should help stimulate home sales, support the second-hand property market, and facilitate upgrading demand." - Mandy Chan, Head of China and HK Equities The government announced property easing measures. What are the potential implications? • The government announced a cut to both China's mortgage down payment requirement and property transaction tax policy on 30 March 2015. • Specifically, the down payment requirement for all second mortgages has been lowered from 60-70% to 40%. The magnitude of this round of policy easing is better than market expectation, as the market was only expecting a reduction of 50%. • For mortgages taken out against the housing provident fund, the down payment requirement for buyers borrowing for their first mortgage has been lowered from 30% to 20%. • Meanwhile, the property transaction tax on homes owned over 2 years will also be waived (lowered from the previous 5 years). • These, in combination with the two recent policy rate cuts, should help stimulate home sales, support the second-hand property market, and facilitate upgrading demand. Following the rally in the A-share market in Q4 2014, the offshore H-share market is trading at a significant discount to its domestic counterparts, as shown by the Hang Seng China AH Premium Index below. The arbitrage opportunities could not be fully exploited even with the launch of Stock Connect. For mainland retail investors to be qualified to invest in Hong Kong shares through Stock Connect Southbound trading, they were required to have a minimum account balance of RMB500,000. Based on China securities clearing house's latest data, by the end of Oct 2014, around 6% of total accounts met the qualification. As of March 20, 2015, total A share accounts was 147 million. For onshore institutional investors, their appetite in H-share market through South Bound trade of Stock Connect was very limited due to the QDII status requirement. Hence, the relaxation in trading rules should create attractive opportunities for onshore institutional investors to diversify their portfolios. Meanwhile, CSRC has relaxed the rules for domestic mutual funds to invest in Hong Kong equities. What is the significance of this move? The China Securities Regulatory Commission (CSRC) announced on 27 March 2015, that newly established domestic mutual funds in mainland China will be allowed to invest in Hong Kong stock market through Shanghai-Hong Kong Stock Connect without Qualified Domestic Institutional Investor (QDII) quota. Existing funds can do the same on condition that this is not inconsistent with their mandate and their clients are informed. No CSRC approval is necessary. The announcement could be a catalyst for the H-share market as valuations are attractive and the recent regulation could increase investor appetite. Source: Bloomberg, data as at 30 March 2015. For illustrative purposes only. Levels above 100 indicate that dual-listed A-shares are trading at a premium to H-share counterparts. How has the market reacted to this news? • The Hang Seng China Enterprises Index (HSCEI) rose 3.4% after the announcement, while the Hang Seng Index gained 1.5%. Net buy orders from Shanghai to Hong Kong via Stock Connect reached a new high of RMB2.56 billion. • Meanwhile, onshore equities, as measured by CSI 300 Index, rose 2.9% after the central bank governor said the government can do more to support growth in China. • The Shanghai property index had jumped 7.3% before the People’s Bank of China (PBoC) cut the down-payment requirement for some second homes. What is the impact of these developments on the HGIF Chinese Equity Fund? • We remain positive on Chinese equities in general, over the medium to long term. • HSCEI is now trading at a forward Price-to-Earnings (PE) of 8.6x (vs. 14.8x of CSI 300). The portfolio is overweight on industrials, and continues to favour H-shares that are trading at deep discount to their A-share counterparts, especially airlines and construction firms. • The small-mid-cap space in Hong Kong will benefit given their attractive valuations, of around 10x to 50x PE. In comparison, the companies listed in ChiNext, the Shenzhen version of NASDAQ, are trading at 50x to 150x PE ratio. • The portfolio continues to be positive on property companies focusing on tier 1 cities given we see potential for undersupply later in the year, while valuations remain at attractive levels. Given that the recently announced easing measures were even higher than the market's expectation, this should be positive for the portfolio. Source: HSBC Global Asset Management, data as at 30 March 2015. Data shown is for illustrative purposes only and does not constitute any investment recommendation. 2 Disclaimer This document is prepared for general information purposes only and the opinions expressed are subject to change without notice. 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