TAIPEI, Taiwan (TheStreet) -- Shanghai has long claimed to be as good a financial hub as Hong Kong. But Shanghai lacks a fully open stock market because Chinese government regulations impose quotas on foreign investment in the Shanghai exchange's A shares. Hong Kong's market is open to anyone.
Now China is poised to let the Shanghai-listed shares of 568 big Chinese companies trade on the Hong Kong exchange. The new linking program is called Stock Connect.
This is good for foreign investors without qualified foreign institutional investor, or QFII, licenses or with small China investment quotas. Eventually foreign investors will be able to buy and sell the same shares long traded by institutions with quotas for mainland China, including Shanghai.
More openness may follow.
"The Stock Connect program is a first step to replace quota schemes, as in the future the Chinese capital market will most probably be open to international investors," says Denis Suslov, a Shanghai financial analyst who runs the QFII data Web site China-XBR.com.
Institutions maxing out their mainland China quotas can top up with Stock Connect, he says. But be ready for declining relevance if there's a lot of quota room left. Mega-institutions such as BlackRock (BLK - Get Report) and Invesco (IVZ - Get Report) may suffer without the exclusivity quotas provide.
"It is too early to write off the quota holders, though their advantage will gradually disappear once Stock Connect proves to be successful," Suslov says.
As of Sept. 1, China's State Administration of Foreign Exchange had awarded QFII quotas to 254 foreign institutions for a total of about $60 billion. Quotas soared in 2012 as China awarded 72, up from 12 in the program's first year, 2003.
When Stock Connect starts, which could be any time, Hong Kong and Shanghai will offer "mutual order-routing connectivity and related technical infrastructure" to let investors on each side trade selected stocks on the other, the Hong Kong exchange HKEx says on its website.
The program is expected to pick up slowly, having little impact on today's trading vehicles until regulators are sure it works. Eventually quota holders may rethink their China strategies, but for now no one's flinching.
Invesco, an Atlanta-based asset manager with quotas worth $250 million quota as of 2006, declined comment on the Stock Connect scheme.
BlackRock sees continued interest in the ETFs that it can provide through its quota, despite A-share access through Stock Connect. The New York-based company -- with $4.32 trillion in total assets under management -- had China quotas of $520 million (including a Chinese yuan allotment) as of June.
"In our view, investors will continue to seek broad exposures and liquid access to the China A-Share market using ETFs in the same way they are used globally, for their benefits of diversification and on-exchange convenience," says Susan Chan, head of BlackRock's iShares Asia Pacific.
As news about the new Stock Connect program spread in September, the Hong Kong arm of Seoul-traded asset manager Mirae Asset Global Investments launched its Horizons CSI 300 ETF, with assets of about $49 million, on the Hong Kong exchange.
"Investors that we speak to are interested to invest in China A shares via cost-efficient and transparent tools," says Laura Lui, Mirae's head of ETFs in Hong Kong.
Access to Shanghai's shares still comes with the same problems that have followed mainland Chinese stocks (though not those of Hong Kong) over much of their 24 years.
Listed companies lack transparency, offer poor value to minority shareholders and face arcane regulations.
"Transparency among Chinese-listed companies has been criticized by experts, and in general you have to expect somewhat less reliable disclosures than in mature markets," Suslov says. "There is not any slowdown in quota granting yet, as investors still seek time-proved channels."
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates BLACKROCK INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate BLACKROCK INC (BLK) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins, increase in stock price during the past year, impressive record of earnings per share growth and compelling growth in net income. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
You can view the full analysis from the report here: BLK Ratings Report