Five Ways to Play Chinese Markets Before Exchanges Link

China said its exchange link between Shanghai and Hong Kong will debut on Nov. 17, giving foreigners unprecedented access to yuan-denominated shares and allowing mainland traders to buy Hong Kong equities.

Now that investors have clarity on the start date, here are some recommendations from firms including Morgan Stanley, Jefferies Group, JPMorgan Chase and Nikko Asset Management on how to make money from the link.

*Large-cap stocks with no Shanghai listing: -- AIA Group Ltd., China Mobile Ltd., Cheung Kong Holdings Ltd. and Tencent Holdings Ltd. are among shares that offer “unique market and sector exposures” to mainland investors, according to Jonathan Garner, the head of emerging market strategy at Morgan Stanley in Hong Kong. Cheung Kong, the property developer controlled by billionaire Li Ka-shing, trades about 15 percent below the average 12-month target price of analysts tracked by Bloomberg.

*Hong Kong’s exchange and brokers: -- Hong Kong will receive “strong fund inflows” as it stands on the front lines of the largest capital account opening of any country since World War II, said Sean Darby, the Hong Kong-based chief global equity strategist at Jefferies Group LLC. Hong Kong Exchanges & Clearing Ltd., Citic Securities Co. and China Galaxy Securities Co. are all among stocks that will benefit, according to Darby. Trading of shares in Hong Kong’s Hang Seng Index and the Shanghai Composite was more than 35 percent higher than the 30-day average today.

*Financial information providers: -- For investors who want to look beyond the brokerage industry, Jingxi Investment recommends mainland providers of financial-market data, including East Money Information Co. and Hithink Flush Information Network Co. These stocks “may be the next target for thematic investment associated with the exchange link,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment. East Money, with a market capitalization of $3.6 billion, has climbed 116 percent this year while Hithink Flush, valued at $1.2 billion, is up 134 percent.

*Dual-listed stocks trading at a discount: -- Some of China’s biggest companies have dual-listed shares valued at a discount in Shanghai because mainland investors favor small-cap companies, said Eng Teck Tan, a senior fund manager for equities at Nikko Asset Management. “There’s a long list of high quality stocks that are totally forgotten and their valuations are so cheap relative to their counterparts,” Tan said. Shanghai-listed shares of Industrial & Commercial Bank of China Ltd. and Tsingtao Brewery Co. trade at a discount of about 9 percent versus those in Hong Kong.

*Shenzhen shares and fixed-income securities: -- China’s Shenzhen Composite Index rallied today with government bonds, even though the securities aren’t included in the Shanghai-Hong Kong link. Some money managers who already invest in China’s domestic markets through the Qualified Foreign Institutional Investor program may be able to free up some of that quota to buy securities outside Shanghai, said Adrian Mowat, the chief Asian and emerging market equity strategist at JPMorgan in Hong Kong.

— With assistance by Shidong Zhang, Eduard Gismatullin, and Kana Nishizawa

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