The Money Train - Will They Or Won't They?

I know its a silly sounding translation from Cantonese, the "direct train" or "straight through train", both referring to the program that was supposed to allow Chinese citizens to invest directly in HK shares. Let's look at the debate, the highs-lows, and the probability in the end.

a) The plan was first announced on August 20th that a pilot program will be started to allow nationals with a Bank of China account in Tianjin to buy HK listed shares. Since that day, the HSI has appreciated some 45% to reach 32,000 but has given back quite a bit over the last two weeks.

b) HSI suffered selling bouts after a Credit Suisse report on Nov 12th said the pilot program had been delayed till 2Q 2008. The report also said that the government may impose a US$30bn cap for the entire program.

c) It is however, more likely that the sell down was due to sentiment being affected by the authorities' clampdown on the illegal money transfers from Shenzhen to buy HK shares (please read blog below).

At the end of the day, China still has too much liquidity despite the recent sell down in China stocks. They already have the QDII program which could see some US$70bn going overseas. The sovereign fund CIC will be investing some US$200bn overseas as well. The "direct train" program is expected to draw out US$30bn into HK. All up, we are looking at taking US$300bn away - if you hook that up with a few more mega A-share listings next year, that will certainly keep a cap on the upside for China equity markets next year, or at least make it a lot harder and volatile. It should be a lot tougher to make money in Shanghai and Shenzhen next year.

On the matter of overseas investments, the bulk of it will go straight for HK listed shares, followed by Singapore and then South Korea. Talking about A-share listings, the current market conditions may have postponed the A-share plans for CNOOC, the next best thing after Petrochina. But it should proceed once the market is on a better footing, look for Jan/Feb 2008 listing. Following that, Zijin should be next, an excellent gold play / commodities play. Also in the news, China Railway Group, the world's third largest construction contractor & the largest in China, will be raising US$5.5bn from its HK and Shanghai IPO for a simultaneous A-share and H-share listing.

So, in conclusion, will the "direct train" become a reality? Chances are very high that it should occur because soaking up liquidity and presenting investors with more alternatives are major priorities to Beijing. On Monday, the Shanghai Stock Exchange announced that it will allow foreign MNCs to list on their exchanges - more alternatives and to soak up liquidity. The 3 companies cited to get the ball rolling were HSBC, Coca-Cola Amatil and Siemens. The HSBC homecoming listing will be an event of major proportions, mark my words.