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July 18, 2018 | Global Equity
The China-A Connection

Partner, Head of Global Equity Trading

Terry O’Bryan, partner, is head of global equity trading for William Blair. Before joining William Blair in June 2007, he managed the equity sales and trading desk at Lehman Brothers in Chicago and was an equity sales trader at Goldman Sachs in Chicago. Before that, he was an F/A-18 pilot for the U.S. Navy on the West Coast for 11 years. Terry received a B.A. in economics and history from the University of Vermont in Burlington.

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The opening of the Shanghai and Shenzhen Connect stock exchanges increased accessibility to China A-Shares, and enhancements made to safeguard China A-Share investors’ interests made the market much more appealing.

Previously, foreign institutional investors could only access domestic Chinese equity markets through the Renminbi Qualified Foreign Institutional Investor (RQFII), the Qualified Foreign Institutional Investor (QFII), but with the launch of the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, a new opportunity arose.

Foreign institutional investors previously had very limited access to domestic Chinese equity markets.

The Connect is a much simpler system. There are restrictions regarding eligible investors under the RQFII and QFII systems that do not exist with the Connect.

The application process for the RQFII and QFII systems is rather onerous, with quotas required, which is not the case with the Connect. And there are lockups under the RQFII and QFII systems, but not on the Connect.

Moreover, enhancements have been made to safeguard China A-Share investors’ interests. Examples of such enhancements include:

  • In 2015, trade settlement was enhanced through the introduction of Special Segregated Accounts (SPSA) model. This also allows investors to use a maximum of 20 brokers to achieve best execution.
  • In 2015, the China Securities Regulatory Commission (CSRC) clarified international investors’ beneficial ownership. Investors are legally entitled to all the rights and benefits of shares acquired through the Northbound trading link (including voting rights, dividends, distributions of earnings, etc.).
  • In 2016, a Delivery Versus Payment (DVP) settlement system was introduced to ensure delivery when payment occurs, and crucial enhancements to trading suspension rules were implemented.

In addition, enhancements have been made to trading suspension rules.

In July 2015, more than 1,400 companies constituting approximately 50% of the China A-Share market suspended their Shanghai- and Shenzhen-listed shares. In response, China introduced stricter regulations of voluntary suspensions.

Key areas of improvement included expanding coverage and trading suspension rules, creating duration limits, enhancing disclosures relative to suspensions, giving exchanges the authority to stop accepting suspensions, and reinforcing controls and sanctions.

As shown in the chart, suspensions have stabilized since then.

Better access to a big, growing market with better safeguards means big opportunities for China A-Share investors, as described in China A-Shares: Access to Dynamic Growth, China A: Opportunity for Active Managers, and China’s Innovation Boom Benefits Active Managers.

Terry O’Bryan, partner, is head of international equity trading for William Blair.

Partner, Head of Global Equity Trading

Terry O’Bryan, partner, is head of global equity trading for William Blair. Before joining William Blair in June 2007, he managed the equity sales and trading desk at Lehman Brothers in Chicago and was an equity sales trader at Goldman Sachs in Chicago. Before that, he was an F/A-18 pilot for the U.S. Navy on the West Coast for 11 years. Terry received a B.A. in economics and history from the University of Vermont in Burlington.

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