China is embarking on a project to make its equity markets more accessible to retail, as well as institutional, foreign investors, at what are at times turbulent times.

These are exciting times – or possibly hair-raising, depending on one’s point of view - to be in the China equity market. In a key infrastructure development, China is due to open up a Hong Kong-Shanghai link allowing foreign investors to play directly in the domestic Chinese equity market.

Analysts at UBS argue that the Mutual Market Access programme, or MMA, sometimes known as the “through-train”, could have dramatic effects on China, which, despite recent decades of quasi-capitalist reforms, is still a closed economy in some ways. Mindful of the dangers of hype, UBS points out that the link is a pilot project, so the scope will be modest, at least initially. The stakes are high – the A-Share market in China is currently worth around $3.9 trillion.

Before MMA gets going, UBS reckons there are potential winnings to be had in Hong Kong-listed stocks that could enjoy an influx of Chinese investment money when the link opens. In particular, there are stocks of dual-listed firms with big valuation gaps – A-shares of large-cap stocks, such as banks, trade at a discount to the H-shares, because Shanghai is dominated by retail investors preferring small-caps, while in Hong Kong, the situation is reversed. There could be some interesting arbitrage opportunities ahead for those fast enough, and bold enough, to make a move.

Will such links boost IPOs? It may not do so directly, UBS says, because the pilot programme only supports secondary market trading, so foreigners cannot take part in IPOs and won’t be entitled to A-shares rights issue, creating a dilution threat. The overall boost to investment flows should, over time, encourage more floats, however.

Even so, the buzz around equity market developments, as well as plentiful liquidity from Beijing, has encouraged a brisk period for IPOs in the early summer. In June, for example, China’s first companies to float on the listed markets saw share prices skyrocket by 44 per cent in their first trading day (source: Bloomberg).

There is a rather large fly in the ointment, however. It is understood that a flood of IPOs, by adding so much fresh supply to the market still nervous about potential speed bumps in the Chinese economy, has been a drag on performance of Chinese shares in recent weeks. (Yesterday, the main Shanghai and Shenzhen bourses were down on the day. The MSCI China Index of shares is down 6.9 per cent for the year so far.) An over-abundance of primary market supply is weighing on prices; there could be a period of digestion before prices recover.

There are broader concerns. Chen Li, who is the A-share strategist of UBS Securities, said in a recent note from the Swiss bank that he is cautious about A-share market in the coming six months because of three long-term market concerns: debt issue, capacity problem and the state of overall property market.

“Although the economic growth is still positive in the short term, the market will not be good as long as the long-term concerns remain unsolved. I think the market has priced in the weakness of the property, the credit default. But there are one downside risk and one upside risk that have not been priced in. The downside risk is stock supply. Although CSRC [regulator] limited IPO number into 100, the secondary market placement increased 40 per cent this year. That means the stock supply is much bigger than expected. The upside risk is the impact of MMA. We do believe many foreigner investors will come to this market to chase cheap decals once MMA is implemented in October.”

The development of the equity market “through-train” can be seen as part of how China, through its allocation of foreign investor quotas and the like, is pushing to make the Renminbi more of a global reserve currency. It cannot easily do that if wannabe investors in the world’s second-biggest economy struggle to get into the door, or if they have to go via the circuitous route of holding Hong Kong-listed shares rather than Mainland ones. It is also worth noting that with the Asian e-commerce giant Alibaba, nearing one of the biggest IPOs in recent history, it has chosen New York, not Hong Kong or Mainland China, as the place to list its shares. China still has a bit of catching up to do.

Even so, all this infrastructure development shows how serious Beijing is on widening the door. To get some idea of how difficult investment has been in the past, UBS notes that two-way investment flows are only possible through the schemes China offers to qualified domestic and foreign institutional investors – large firms usually – and they must endure rigid approval processes. “The MMA will democratise this flow by being available to retail investors,” argues Min Lan Tan, Asia-Pacific head, chief investment office, UBS Wealth Management.

She goes onto argue that if the MMA pilot project is a success, it could be expanded in two says, such as to the Shenzhen stock exchange, which tends to be dominated by small- and mid-cap stocks, by 2015. And MMA could set up stock market links with offshore Renminbi centres. After Hong Kong, Singapore and Taiwan hold the largest Renminbi deposits; for obvious political reasons, Singapore, rather than Taiwan, might be the next centre to hook up to the “through-train”.

China’s moves to encourage foreign retail investors is welcome. Whatever the glitches and warnings, the direction of travel towards a more open China is unmistakable.