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Shanghai-Hong Kong Stock Connect is key to investment in China

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Dec. 9 2014, Published 10:48 a.m. ET

The Shanghai-Hong Kong Stock Connect program

Beginning November 17, a new link has been established between Hong Kong’s Hang Seng stock exchange and the Shanghai stock exchange in mainland China, known as the “Shanghai-Hong Kong Stock Connect.”

Currently, exchange-traded funds such as the iShares China Large-Cap ETF (FXI), the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR), and the iShares MSCI China Index Fund (MCHI) invest in Chinese equities, and the iShares MSCI Hong Kong Index Fund (EWH) invests in the Hong Kong equity market.

The iShares MSCI All Country Asia ex Japan Index Fund (AAXJ) tracks the performance of 11 developed and emerging equity markets, including China (22.13% allocation) and Hong Kong (12.51% allocation).

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Foreigners can now invest in A-shares

The Shanghai-Hong Kong Stock Connect program allows foreign investors to directly invest in shares of many of China’s largest companies, known as A-shares. The program allows global investors to invest in a wide range of companies in China that had been largely cut off from international funds. Many of these companies will likely benefit from the shift of China’s economy from manufacturing toward consumer spending.

Read more about China’s shift in approach in our article, Why China needs a new approach to boost consumption.

The exchange aligns with Xi’s strategy

According to Bloomberg, the exchange link marks one of China’s biggest steps toward opening up the capital account, increasing the use of the yuan, and turning Shanghai into an international financial center. The exchange link will give foreign investors greater access to Chinese companies tied to the nation’s consumer spending, which Chinese President Xi Jinping is counting on to reduce the dependence of the world’s second largest economy on exports and infrastructure spending.

Specifically, the Shanghai-Hong Kong Stock Connect should benefit foreign investors, Chinese corporations, and the Chinese economy at large, as the next article will discuss.

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