Sec­ond ‘through train’ off to a slow start

Con­nect pro­gram serves as bridge link­ing over­seas and main­land in­vestors

China Daily (Hong Kong) - - FRONT PAGE - By DUAN TING in Hong Kong tingduan@chi­nadai­

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.

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