China Strategy:From China,with love

Rising southbound inflows to H shares

We view the planned expansion of the Connect program to include mainlandinsurance monies as the latest step in a structural shift of mainland monies toHong Kong. The shift began last year and we anticipate the share of mainlandmonies in daily HK market trading will eventually rise to 30-40% versus anhistorical level of 10-15%. The shift is being driven both by increased politicalinvolvement following the Occupy protests and by a desire among themainland financial sector to diversify away from the domestic economy andthe Renminbi. The Connect is only one of the channels being used to facilitatethis flow.

China’s outbound investment as a percentage of GDP is still only half thelevels that Japan and Korea have sustained over the past two decades. Weforecast China outbound investment will reach 2.6% of GDP in 2020versus1.5% last year. Hong Kong will remain both a destination and conduit forthese flows.