East Capital joins China’s ‘through train’

China and Hong Kong flagsEast Capital, a specialist emerging markets fund manager based in Stockholm, has gained permission to invest in China’s A shares market through a Chinese trading link launched in November.

The firm says its East Capital (Lux) - China Fund is the first Luxembourg-domiciled Ucits product to announce it can invest as much as 100% of its portfolio in A shares through the Shanghai-Hong Kong Stock Connect programme, known informally as the ‘through train’.

Stock Connect allows foreign investors to purchase shares listed in Shanghai through a portal in Hong Kong and Chinese investors to purchase Hong Kong shares through Shanghai. Foreign investors do not need the official Qualified Foreign Institutional Investor (QFII) quota, which is normally essential for investment on the mainland.

Karine Hirn, partner and co-founder of East Capital, says the A shares market is “fascinating” for several reasons compared to the market in Chinese companies offered in Hong Kong.

“There is a wide range of interesting and often privately held and entrepreneur-driven companies in sectors such as healthcare, consumer goods, services and specific industries that are listed on the A-shares market.

“The Chinese companies listed in Hong Kong, so-called H shares, are more often larger companies, state owned enterprises and banks.”

Despite the strong rally at the end of 2014, East Capital says the A shares market is still trading at a price/earnings ratio of 14-times, which is 20% below its ten-year historical average.

Aberdeen Asset Management recently announced it would launch a China A share fund making use of a QFII quota.

Nicholas Yeo, head of Chinese equities at Aberdeen, said at the time that China is going through a complex adjustment period owing to a legacy of bad debts and fraud.

“With this fund we are not saying now is the right time to buy the market, but asking investors to consider China as a long-term proposition,” Yeo said.

Investec recently announced it was the first global manager of Ucits funds to gain permission to invest through Stock Connect.

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