For equity investors seeking substantial access to the Chinese market, 2018 brought welcome news.
The China Securities Regulatory Commission (CSRC) announced it would undertake a new pilot scheme in which three mainland companies will be allowed to release some of their non-tradeable H-shares into circulation on the Hong Kong Stock Exchange.
If the scheme proves to be a success this time round, then it could be rolled out to other mainland firms listed in Hong Kong. According to UBS research, we are sitting on non-tradeable H shares worth a collective HK$2.6trn ($332bn).
If this all sounds familiar, that is because it has been done before.
In 2015, investors saw the potential consequences of this new scheme when the government attempted to expand and liberalise the country's equity market through a similar, but larger scheme.
However, the process was not handled well and led to a sell-off, creating shockwaves on a global scale.
The new pilot scheme follows a broader series of reforms, laid out during the 19th Party Plenum in October 2017 by President Xi Jinping, including a push to reorganise China's state-owned enterprises (SOEs).
For too long, uncompetitive SOEs have hindered the flow of capital and resources to more productive sectors, undermining the economic stability of China.
Enabling SOEs to issue more H-shares could help by broadening these companies' ownership bases and encouraging a greater focus on investment returns and efficiency.
However, the objective of the new pilot scheme is the same: to give Chinese firms greater access to equity and bond markets for more sustainable, long-term investments.
The scheme has the potential to boost liquidity and bring about a greater alignment between controlling parties and public investors, among other benefits.
Nevertheless, while the new scheme is a promising start, any expansion of the Chinese equity market could affect the performance of shares that are already listed there.
To therefore fully understand how this scheme could impact performance, investors need to look at the dynamics of market expansion.
Equity markets can grow in one of two ways. If the constituent companies rise in value, they lift the market capitalisation of the whole index. This has been seen in the US equity market over the last several years.
Then 'de-equitisation' occurred driven by companies engaging in equity buybacks, de-listing from exchanges entirely, or takeovers.
This caused the number of free-float adjusted shares outstanding on the MSCI North America index to decline to its lowest level since 2010. As the number of listed shares declined, the price of those that remained tended to go up.
Considering adding Income Focus fund
Industry Voice: Two decades of experience have shown us that deploying an ESG focus is entirely complementary to long-term performance goals.
Russ Mould, investment director at AJ Bell, looks at four contributors to the upward march of the FTSE 100.
Next stage of development
Poor practice highlighted