Alibaba’s Connect Membership May Be a Boon for Overseas Stocks

Alibaba Group Holding Ltd.’s impending inclusion in the Stock Connect may unleash as much as $3.2 billion of cash across global markets. Analysts say that Japan and US equities are potential beneficiaries.

The addition will allow qualified domestic institutional investor funds to own shares of Alibaba via the connect, instead of accessing them via their foreign exchange quota. Asset managers can then use the quota that’s freed up to buy other shares including overseas names.

The inclusion is likely to provide a further fillip for foreign equities such as US and Japanese stocks which have handily outperformed Chinese stocks this year. The benchmark CSI 300 Index has lost over 3% since end-December, compared with a gain of more than 10% for both the S&P 500 and Topix gauges.

“US stocks are simply offering better returns so there’s going to be unstoppable demand, that’s the hard truth,” said Yu Aibin, fund manager at Shenzhen Jointfull Capital Management Co. “For larger investors, positioning via QDII funds, even with some premiums, is still a good deal, as the cost of capital is lower than through other channels such as cross-border swaps.”

QDII allows institutional investors who meet certain conditions to invest in foreign securities within prescribed quotas. Analysts say Alibaba may gain connect membership as soon as Sept. 9. It primary listing, which takes effect Wednesday, is likely to make it eligible for southbound trading in early September following the next review.

Bloomberg Intelligence estimated that the freed-up QDII quota would total $3.2 billion, larger than the $2.3 billion added in June when China lifted a cap on foreign securities investment. The total approved quota for asset managers was bumped up by $1.6 billion back then.

To be clear, the positive effects won’t be immediately evident.

Bloomberg Intelligence reckons it’ll take three years for the quota to be fully available as money managers tend to gradually phase out their holdings via redemptions and subscriptions. BI noted it has taken two years for the Shanghai listed Huatai-PineBridge CSOP Hang Seng Tech Index ETF to convert 71% of its underlying Hong Kong-listed product from QDII to the Stock Connect.