While most of the attention has focused on investment into China, capital coming out of China is likely to be the more important story, explained Will Stephens, Head of Quantitative and Systematic Strategy, Asia Pacific, at Credit Suisse, and the author of the report. “We believe that studying the trends of Southbound investors can provide significant insights into what to expect as China further liberalizes its capital account, as well as create an attractive opportunity to boost alpha generation in Hong Kong,” Mr. Stephens said.

A key question for global asset prices

Commenting on the scale of the opportunity, Mr. Stephens said: “China saves 47% of GDP[1] and has CNY 89 trillion (US$ 12.6 trillion) of household savings[2] to deploy; how Chinese households invest their savings will be one of the key long-term questions for global asset prices as liberalization accelerates.”

Currently, this “QE”-sized wall of capital is largely confined within China, fueling massive onshore liquidity. As restrictions ease, the resulting outflows will have a similarly outsized impact. The first testing ground of this trend is the Stock Connect program, which facilitates cross-border capital flows between the Hong Kong and Chinese stock markets. The Southbound flows from domestic Chinese investors have re-ignited liquidity in Hong Kong and are now the key marginal driver of stock prices, Mr. Stephens noted.

Why Southbound flows matter to Hong Kong

Southbound investors now hold more than US$160 billion of Hong Kong-listed stocks and are among the top holders of the individual stocks in which they are active, including many of the largest companies listed in Hong Kong. In terms of turnover, Southbound investors have accounted for 20-25% of gross turnover year to date[3], representing the highest levels seen since the Stock Connect program was launched in late 2014. Their impact has steadily increased since the launch of the program, a trend that Mr. Stephens expects to continue given the scale of Chinese capital relative to Hong Kong liquidity.

Utilizing machine learning techniques and the unique Credit Suisse Southbound Sentiment Strategy (CSJACSS), the team helps investors to identify the most informative Southbound trends and how they forecast future stock-level alpha.

Mr. Stephens is among the Credit Suisse thought leaders who have shared their insights during the China Expert Perspectives webinar series at the 7^th Credit Suisse China A-Shares Conference. Further topics covered earlier this week by the bank’s thought leaders include the bright spots in the Chinese economy, the trends that will shape the future of China’s unicorns, and the investment opportunities in the China onshore hedge fund space.

In addition, the China Expert Perspectives webinar series features two external expert speakers: prominent political analyst Cheng Li, who discussed the future of China-US relations, and influential economist Yongding Yu, who will join the conference today to examine the major trends and the broad economic landscape and growth prospects in China amid the coronavirus pandemic.

A bumpy road ahead – but China’s equity market to show resilience

Commenting on the prospects for China’s stock market on the sidelines of the conference, Edmond Huang, Head of Hong Kong/China Research and Head of China Equity Strategy at Credit Suisse, said: “We expect China’s equity market to benefit from a combination of monetary and fiscal stimulus measures domestically and globally, largely offsetting the negative impact of a prolonged recession resulting from the pandemic.”

China has launched a broad range of monetary policies and fiscal stimulus measures to cope with the impact of the coronavirus pandemic and to boost the health of the economy. Mr. Huang observes that the country is now on track to return to normal, and consumption demand is gradually regaining momentum.

China’s equity market looks set for a bumpy road ahead with strong headwinds given there are many variables, not only on the coronavirus front, but also from a broader economic, social and geopolitical perspective. However, Credit Suisse believes the market will remain resilient, relative to the global markets.

Broad research coverage capabilities

Credit Suisse has one of the most comprehensive and highly recognized China Research coverage capabilities. The Credit Suisse Equity Research team covers more than 430 Chinese-listed stocks, including about 180 domestic A-shares, which represent over 70% of the CSI-300 index constituents by market capitalization. In addition, the HOLT platform covers close to 2,000 A-share companies and more than 3,000 stocks across Hong Kong and mainland China.