After nearly four years, A-shares have once again become stocks that can be bought by foreign capital. On March 5, Dazu Laser issued a notice stating that since the foreign shareholding ratio exceeded the upper limit of 28%, the Shenzhen-Hong Kong Stock Connect will suspend the purchase of the stock from now on, but selling will still be accepted. According to statistics, since the beginning of 2019, foreign capital has injected RMB 131.8 billion through the Shanghai-Shenzhen-Hong Kong Stock Connect northbound trading, with an average daily net inflow of RMB 3.3 billion yuan.

The massive inflow of foreign capital is changing the ecology of A-shares. According to statistics, on the market closing of March 5, the stock market value of the northbound fund has reached RMB 998.2 billion, accounting for 4.61% of the free float market capitalization of A shares. Although there was net outflow of northbound funds on March 6th, referring to the three major index gains of the day, its stock market value should have exceeded RMB 1 trillion. At this point, the northbound funds officially become the forefront of the A-shares. If the shares of QFII and RQFII are added, this would be like the equivalent of the public offering of a fund. The allocation of the northbound fund and the shareholding strategy are now experiencing subtle changes.

Previously, when the northbound fund favored the big blue-chips, the purchasing price in Shanghai Stock Connect is often higher than that of the Shenzhen Stock Connect. However, statistics show that this situation has changed significantly. Last week, MSCI announced that it would add the growth enterprise market (GEM) to the list of securities exchanges that meet the rules of its global investable market index. Chin-ping Chia, head of Asia Pacific research at MSCI, said that most international investors have accepted China including mid-cap A-shares and GEM stocks into the MSCI system. Many investors have even begun to invest in mid-cap or GEM stocks.

Although the northbound fund pays more attention to long-term value investment, this does not mean that it will continuously purchase under the high-point. With the volatility of the index, the northbound fund will also conduct band trade. For example, in the last trading day of September 2018, the long-suffering northbound fund reappeared, and the net purchase was RMB 5.749 billion. However, in the first trading day after the Chinese National Day holiday season in 2018, the northbound capital had a large net outflow of RMB 9.716 billion. Following this, there were net outflows for several consecutive days.

By the end of 2018, the domestic Chinese RMB stock assets held by overseas institutions and individuals under the Chinese central bank's regulation reached RMB 1.15 trillion. It can be seen that foreign capital has become one of the three major forces, along with public offering fund and insurance fund. In the future, with the inclusion of major indices in A-shares, foreign investment will have a significant impact on A-shares.

Firstly, A shares will be further institutionalized. Currently, the A-share market is still dominated by retail investors. According to the Shanghai Stock Exchange Annual Statistics 2018, as of the end of 2017, the number of shares held by natural person investors in Shanghai stock market was 39,934,100, with a total stock market value of RMB 5.9445 billion, accounting for 21.17%. The number of professional institutions holding accounts was 48,600, with stock market value of RMB 454.94 billion, accounting for 16.13%. Due to the scale advantage of information and capital, the large amount of foreign investment may make it easier for retail investors to follow the trend and be gradually eliminated by the market. This has made A-shares more institutionalized, as evidenced by the internationalization of the Korean and Taiwanese stock markets.

Secondly, the correlation between A-shares with European and American markets will further increase. Since foreign capital is allocated to the global market, the European and American markets are the focus of the allocation of these funds. Therefore, changes in the European and American markets will lead to changes in the allocation of foreign capital, which will lead to the reconfiguration of its global funds. Since the European and American markets are usually the indicators of the world market, changes in the European and American markets will affect other markets. As the proportion of foreign shares in China's A-shares increases, the impact of European and American markets might be reflected in the A-share market rather quickly, making the A-share market increase its linkage with foreign markets.

Finally, the value discovery function of the market can be further enhanced. Before the entry of foreign capital, domestic Chinese institutions, compared with the majority of retail investors, have various advantages, and they can use these advantages to “harvest” retail investors. Therefore, there is no incentive to increase the level of investment and research, nor to make long-term investments, so that the market value cannot be fully exploited. However, compared with foreign capital, domestic institutions do not have much advantages, especially with the large amount of foreign capital entering. Domestic Chinese institutions may also become targets of harvesting. This will then create a wave of survival of the fittest, so that uncompetitive institutions will be eliminated, while more competitive institutions will stay and turn to value investment. This will help to bring out the market's value discovery function, thereby making resource allocation more reasonable.

Final analysis conclusion:

The large amount of foreign capital will not only promote the A-shares to be more institutionalized, but also increase its linkage with foreign markets, especially the value discovery function that is conducive to the enhancement of the market.