Second ‘through train’ off to a slow start
Connect program serves as bridge linking overseas and mainland investors
Overseas investors showed greater interest in Shenzhenlisted shares as the longawaited, second cross-border stocks “through train” between Hong Kong and the Chinese mainland rolled off the tracks on Monday despite a slow start amid global economic uncertainties.
The kickoff of the Shenzhen-Hong Kong Stock Connect, which came just more than two years after the launch of a similar link with Shanghai, saw nearly 21 percent of the daily northbound quota of 13 billion yuan ($1.9 billion) being snapped up, while less than 10 percent of the daily southbound quota of 10.5 billion yuan was used.
Ceremonies were held simultaneously at the Hong Kong and Shenzhen bourses to mark the start of the new link, which heralds another giant leap forward in the nation’s opening up of its capital markets.
Speaking at the ceremony in Hong Kong, Charles Li Xiaojia, chief executive of Hong Kong Exchanges and Clearing Ltd, said the Shenzhen connect will lead to more cross-border equity investment links.
He said the primary objective of the new “through train” is to build a bridge between overseas and mainland investors so that the mainland’s wealth can be diversified and deployed globally through Hong Kong.
According to Li, the total cross-border market value of Hong Kong, Shenzhen and Shanghai has swelled to about 75 trillion yuan, making it the second-largest worldwide, adding that the Shenzhen link offers access to the “most creative and innovative” enterprises in the mainland.
He expects a series of other financial rollouts to follow, including links concerning exchange-traded funds, initial public offerings, bonds and commodities.
“The ETF is a very important next step underlying connect programs,” he said, and it will allow Hong Kong access not only to mainland wealth, but also to a variety of sectors and industries from other regions to help in the country’s diversification and the globalization of its wealth.
Many market analysts surveyed by China Daily reckoned that southbound investment will attract more capital inflow into Hong Kong.
Kinger Lau, managing director and chief China strategist at Goldman Sachs, said southbound investment should be well-anchored by potential further depreciation of the yuan, while the incremental southbound universe of small caps could offer value proposition.
Rocky Cheung, executive director and head of investment products and adviser at DBS Bank (Hong Kong) Ltd, however, said the upside 80 percent potential of A shares to be included in the MSCI Index this year, coupled with apprehension over the impact of US interest rate hikes on the Hong Kong stock market, would encourage more investors to invest northbound.
Thus, in the medium term, he forecast that A shares are likely to outperform their H peers.
Peter So, managing director of research at CCB International Securities Ltd, said the stagnant performance of the stock markets, which will probably last three months or so, is mainly due to the fact that the market had discounted the new stock link for some time and had well positioned themselves in the past few months, coupled with a volatile global economic environment and tightened liquidity.
The launch of the Shenzhen-Hong Kong Stock Connect was overshadowed by renewed economic uncertainties in Europe, arising from Italian Prime Minister Matteo Renzi’s decision to quit after a referendum threw out his proposed constitutional reforms.
Hong Kong’s benchmark Hang Seng Index shed nearly 60 points to close at 22,505.55 on Monday, while the Shanghai Composite Index lost 1.21 percent and the Shenzhen Component Index was down 1.18 percent at the close of trading.
The much-anticipated Shenzhen-Hong Kong Stock Connect, which links the mainland’s southernmost stock exchange with the SAR’s, made its debut on Monday.
With the official launch of Shenzhen Connect, there will be nearly 2,000 shares in total which could be mutually invested by both Hong Kong and mainland investors, including 568 of Shanghai’s A shares, 881 of Shenzhen’s A shares, and 417 of Hong Kong stocks. This will definitely reinforce Hong Kong’s position as an international finance center and the center of offshore renminbi business. It shows the strong support of the central government to Hong Kong.
For the mainland, the Shanghai-Hong Kong Stock Connect is just a pilot experiment to explore the stock market. Since its start on Nov 17, 2014, despite the dramatic and disastrous fluctuations in stock markets on the mainland, the Shanghai Connect operations have generally gone quite smoothly. Benefitting from the experience of the Shanghai Connect, the Shenzhen Connect should therefore be more stable and flexible.
The biggest modification of the Shenzhen Connect is the cancellation of investment limits. These have also been canceled for the Shanghai Connect. This will greatly facilitate investment as well as boost the internationalization of renminbi. With Britain negatively affected by Brexit, Hong Kong’s position as the center of the offshore renminbi business will be much improved.
Although there are no longer any limitations on the total amount of investment, the market is not 100 percent open yet. Both the Shanghai and Shenzhen Connects keep the daily quota — 13 billion yuan ($1.89 billion, or HK$14.65 billion) for Hong Kong investors and 10.5 billion yuan for mainland investors — to control cross-boundary fund flows. It will very much depend on the maturity and stability of the mainland’s financial markets as to whether this quota can be relaxed or even revoked.
According to the accumulated data of the Shanghai Connect, the southward flow of funds is noticeably greater than the northward flow. This leads to the phenomenon of mainland capital swarming into Hong Kong. I believe this will also be the case for the Shenzhen Connect, especially as the renminbi continues to devaluate. More and more mainland investments are expected to hedge with Hong Kong stocks against further devaluation of the renminbi, as the Hong Kong dollar is linked to the US dollar.
But I also believe Hong Kong investors will prefer to buy Shenzhen shares rather than Shanghai ones. As we all know, with creative industries enjoying a rapid expansion in Shenzhen, the Shenzhen Stock Exchange is abundant with the stocks of emerging industries, such as information technology and media, which will be more attractive for overseas investors. Moreover, the geographical proximity between Hong Kong and Shenzhen will introduces investors to a more familiar market. The reaction to all this is therefore likely to be more positive.
EDDY LI The author is the president of the Chinese Manufacturers’ Association of Hong Kong. As we all know, with creative industries enjoying a rapid expansion in Shenzhen, the Shenzhen Stock Exchange is abundant with the stocks of emerging industries, such as information technology and media, which will be more attractive for overseas investors.”
Hong Kong’s stock market is quite mature after decades of operations, and is attractive to many investors with generally reasonable PE (priceearnings) ratios and close surveillance. The connect between the mainland and Hong Kong stock markets will not only bring investment to our city, it will also promote Hong Kong as an asset management center in Asia and enable Hong Kong to participate more actively in the Belt and Road Initiative.
This is not the first time for Hong Kong to enjoy the central government’s preferential policy in the finance sector. The advantage Hong Kong enjoys in the “One Country, Two Systems” policy is much envied by other financial markets. For foreign competitors, Hong Kong belongs to the “One Country”, which will provide policies beneficial to us; and for mainland cities, Hong Kong is advantageous in adopting a different system.
Chief Executive Leung Chun-ying (right) and Chow Chung-kong, chairman of Hong Kong Exchanges and Clearing Ltd, ring the opening bell at the launch ceremony of the Shenzhen-Hong Kong Stock Connect on Monday.