China, the world’s second-largest economy, is making moves on the policy front almost every week, such as through changes to how its renminbi-related capital and financial markets work.

Media reports said that in the first few minutes of the MMA going live, there was a strong flow of money heading Northwards, according to a report yesterday by the Financial Times (of the UK) publication. It said that within five minutes of the link’s launch, international investors had bought over RMB5 billion ($817 billion) in Shanghai-listed shares, and approached the halfway mark on the daily quota of RMB13 billion in about 10 minutes.

Separately, as global leaders gathered for Group of 20 meeting in Australia, China agreed a large free trade deal with Australia. Both countries have a close trading link – China is a large importer of Australia’s mining output, for example. The deal will open up Chinese markets to Australian farm exporters and the services sector while easing curbs on Chinese investment in Australia. China is already Australia's top trading partner, with two-way trade of around A$150 billion ($130 billion) in 2013. This week the nations witnessed 14 commercial agreements between companies worth potentially more than A$20 billion (source: Reuters).

With so many developments, the overall picture looks rosy for China. However, comments later yesterday by Patrick Ho, deputy head equity for APAC at UBS Wealth Management CIO, struck a more cautious tone about developments in the short term. Ho addressed the impact of the MMA link.  

“The extent to which daily trading quotas were taken up on day one showed a mixed response from investors, with interest in northbound trading greatly outweighing that in trading southbound. Over half of the northbound quota was taken up at the market open.  In the morning session, 82 per cent of the northbound quota but only 11 per cen of the southbound quota had been used,” Ho said.

Referring to the sharp imbalance, Ho continued: “Many investors are clearly adopting a wait-and-see approach but we expect a pick-up in interest in the coming months.”

“Fundamentally, the MMA launch, alongside other ongoing capital account opening reforms, supports our view that China is set to see greater capital outflows in the coming year(s),” he said. “These outflows will be further encouraged by the property downturn, softening growth outlook, expected rise in global interest rates and fall in domestic rates, and increasing desire by domestic residents to diversify their assets overseas. In light of this, a strengthening to be included in global indices such as the MSCI.

Fund industry cheers
Perhaps unsurprisingly, the start of live trading on the MMA drew a welcome from the Hong Kong Investment Funds Association. “The announcement of the capital gains tax waiver in relation to Shanghai-HK Stock Connect (as well as QFII and RQFII) is a significant step to address one of the important issues raised by HKIFA,” Bruno Lee, HKIFA chairman, said.

“It is an important development that will essentially integrate the Hong Kong and Mainland China A markets to create a single China market which could rank as the world’s second largest equity market by market capitalisation and will foster the development of the Mainland capital markets by broadening the investor base and enhancing corporate governance standards,” he said.

“SC will be instrumental in reinforcing Hong Kong’s position as an asset management centre, particularly as an important platform for Mainland investors to invest offshore; and for overseas investors to access the Mainland China capital market,” Lee said.

“We anticipate that soon after the launch of SC, regulations relating to the Mainland China/Hong Kong Mutual Recognition of Funds Scheme will be announced,” he added. His trade organisation has 63 fund management companies as full/overseas members, managing about 1,200 SFC-authorised funds with AuM totalling around $1.025 trillion at the end of September 2014.