Alibaba Group Holding Ltd. is on the brink of joining the Stock Connect program, a move that could inject up to $3.2 billion into global markets. Analysts suggest that this influx of capital may particularly benefit equities in Japan and the United States.
Impact of Stock Connect Inclusion
The Stock Connect program will allow qualified domestic institutional investor (QDII) funds to purchase Alibaba shares directly through the connect, bypassing the need to use their foreign exchange quotas. This shift frees up those quotas, enabling asset managers to invest in other securities, including international stocks.
Analysts predict that this change could lead to increased investment in foreign equities, especially in the U.S. and Japan. These markets have significantly outperformed Chinese stocks this year. For instance, while the CSI 300 Index has declined by over 3% since December, both the S&P 500 and Japan’s Topix have gained more than 10%.
Strong Demand for U.S. Stocks
“U.S. stocks are simply offering better returns, so there’s going to be unstoppable demand; that’s the hard truth,” said Yu Aibin, a fund manager at Shenzhen Jointfull Capital Management Co. He explained that for large investors, positioning through QDII funds remains attractive, even with some premiums, as the cost of capital through this method is lower than other channels like cross-border swaps.
The QDII program allows institutional investors who meet certain criteria to invest in foreign securities within specific quotas. Alibaba is expected to gain Stock Connect membership as early as September 9, following its primary listing that takes effect this Wednesday. This inclusion is likely to make the company eligible for southbound trading after the next review in early September.
Significant Financial Impact
Bloomberg Intelligence estimates that the QDII quota freed up by Alibaba’s inclusion could total $3.2 billion. This figure is larger than the $2.3 billion added in June when China removed a cap on foreign securities investment. At that time, the total approved quota for asset managers increased by $1.6 billion.
However, it’s important to note that the positive effects of this change may not be immediately apparent. Bloomberg Intelligence suggests that it could take up to three years for the full quota to become available, as money managers typically phase out their holdings gradually through redemptions and subscriptions.
For example, it has taken two years for the Shanghai-listed Huatai-PineBridge CSOP Hang Seng Tech Index ETF to convert 71% of its underlying Hong Kong-listed product from QDII to the Stock Connect.
In summary, while the inclusion of Alibaba in the Stock Connect program is expected to bring significant financial benefits, the full impact will likely unfold over time.
