HKedge over Shen­zhen seen

China Daily (USA) - - BUSINESS -

The Shen­zhen-Hong Kong Stock Con­nect­may ben­e­fit theHongKong stock mar­ket more than Shen­zhen’s due to val­u­a­tion con­cerns, the for­eign exchange fac­tor and val­ue­hunt­ing.

The State Council on Tues­day had okayed the sec­ond main­land stock exchange link with­Hong Kong, say­ing the prepa­ra­tion work has been com­pleted and ap­proved.

HongKongEx­change­sandClear­ing Lim­ited--HKEx--ex­pect­s­the­newlink will be im­ple­mented by the year-end.

There will be no ag­gre­gate trad­ing quota when trad­ing starts be­tween the Shen­zhen and Hong Kong ex­changes. The to­tal quota will be re­moved for the ex­ist­ing Shang­hai-Hong Kong Stock Con­nect that be­came op­er­a­tional in 2014, the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion said.

The daily limit on the Shen­zhenHong Kong link will be the same as that on the Shang­hai-Hong Kong link: 13 bil­lion yuan for or­ders go­ing from Hong Kong to the main­land and 10.5 bil­lion yuan for or­ders com­ing from Shen­zhen toHong Kong.

“We think that the Hong Kong mar­ket, on bal­ance, stands to gain more from port­fo­lio di­ver­si­fi­ca­tion of main­land in­vestors. Main­land in­vestors ac­quir­ing Hong Kong dol­lar-de­nom­i­nated stocks can hedge against the risk of ren­minbi de­pre­ci­a­tion. The cheap stock val­u­a­tions of the Hong Kong mar­ket also of­fer good bar­gains for main­land in­vestors,” said Ai­dan Yao, se­nior emerg­ing mar­ket Asia econ­o­mist at AXA In­vest­ment Man­agers, the as­set man­age­ment arm of French in­surer AXA.

“The Shen­zhen-Hong Kong Stock Con­nect is com­ple­men­tary to the Shang­hai-Hong Kong Stock Con­nect. The Shang­hai mar­ket has more ‘old econ­omy’ com­pa­nies that come from tra­di­tional in­dus­tries and more large-cap stocks, whereas Shen­zhen has more ‘new econ­omy’ com­pa­nies of­fer­ing ac­cess to smal­land mid-cap growth stocks,” said Sally Wong, CEO of the Hong Kong In­vest­ment Funds As­so­ci­a­tion.

HSBC said in a mar­ket strat­egy re­port it ex­pects the new link will likely boost Hong Kong small-caps’ per­for­mance. But the link also pro­vides in­dus­try-level ex­po­sure to over­seas in­vestors keen on Shen­zhen’s promis­ing

The link will also likely bol­ster cross-bor­der yuan flows, strengthen the de­vel­op­ment of the main­land A-share mar­ket’s hedg­ing mech­a­nism and boost A shares’ prospects for in­clu­sion in the MSCI Emerg­ing Mar­ket In­dex, HSBC said.

“The Shen­zhen-Hong Kong Stock Con­nect will stim­u­late over­all de­mand for off­shore yuan as over­seas in­vestors need the yuan to set­tle share trans­ac­tions aris­ing from the stock mar­ket link,” said Su Jie, high-growth com­pa­nies. se­nior econ­o­mist at Bank of China (Hong Kong).

BoCHK is also op­ti­mistic the new link will for­tify the hedg­ing mech­a­nism of the A-share mar­ket.

“The Hong Kong eq­uity mar­ket is dom­i­nated by over­seas in­sti­tu­tional in­vestors that op­er­ate un­der a so­phis­ti­cated reg­u­la­tory frame­work. Hence, main­land in­vestors can hedge in­vest­ment risks on their main­land share port­fo­lios by buy­ing Hong Kong-listed stocks,” Su said. “The link can help de­velop the hedg­ing prod­uct mech­a­nism of the A-share mar­ket in fu­ture.”

The link will en­able over­seas in­vestors to trade in 880 stocks listed on the Shen­zhen Stock Exchange Com­po­nent In­dex and the Shen­zhen Stock Exchange Small/Mid Cap In­no­va­tion In­dex, whose col­lec­tive mar­ket value is more than 6 bil­lion yuan. They can also buy stocks listed in both Shen­zhen andHong Kong.

Buy­ing shares traded on Shen­zhen’s ChiNext small-cap gauge will be lim­ited to in­sti­tu­tional in­vestors at the ini­tial stage of the link.

The link rep­re­sents the sec­ond chan­nel for for­eign in­vestors to buy main­land’s stocks. It also lifts re­stric­tions on as­set flows, and could po­ten­tially pave the way for in­clu­sion of the A shares in the MSCI indices in fu­ture.

As many as 58 of China’s 95 bro­ker­ages have been down­graded by the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion in its an­nual clas­si­fi­ca­tion.

The main reasons for the down­grades are bro­ker­ages’ non­com­pli­ance with reg­u­la­tions, flout­ing of rules and be­low-par risk man­age­ment ca­pac­ity, ac­cord­ing to Dong Dengxin, a re­searcher at the Wuhan Uni­ver­sity of Sci­ence and Tech­nol­ogy and a fi­nan­cial an­a­lyst.

Researchers said the down­grades will help make the mar­ket more trans­par­ent and cleaner.

But, the down­grades are also ex­pected to fur­ther squeeze bro­ker­ages’ al­ready shrink­ing net profit due to mar­ket fluc­tu­a­tions.

The pre­vi­ous an­nual re­view led to five down­grades last year.

The CSRC clas­si­fi­ca­tion sys­tem ac­cords ranks or rat­ings to bro­ker­ages based on their record or per­for­mance. A set of cri­te­ria de­ter­mines a bro­ker­age’s rank. Key fac­tors are risk man­age­ment ca­pac­ity, prof­itabil­ity and com­pli­ance.

Eleven ranks are dis­trib­uted over five classes. The top-rated A Class has three ranks: AAA, AA and A. Ditto for the B class (BBB, BB, B) and the C class (CCC, CC, C), fol­lowed by theD­class (D) and the bot­tom-of-the-pile E class (E).

Cur­rently, no bro­ker­age has the high­est AAA rat­ing. Only eight bro­ker­ages are rated AA.

Ac­cord­ing to the CSRC reg­u­la­tions, a down­graded bro­ker­age is re­quired to in­crease its al­lo­ca­tion for its in­vestor-pro­tec­tion fund.

Else, it would at­tract fresh re­stric­tions that would stop it from start­ing a new line of busi­ness as well as ex­pand­ing cur­rent busi­nesses, said an­a­lysts.

FounderSe­cu­ri­tiesLtd, which­was clas­si­fied as A last year, was down­graded to C this year for sev­eral in­stances of flout­ing theCSRCrules.

Ac­cord­ing to Founder Se­cu­ri­ties, it has been probed and pun­ished for break­ing dis­clo­sure rules and for not meet­ing the ‘know your cus­tomer’ or KYC norms in some trans­ac­tions.

Fol­low­ing the down­grade, Founder Se­cu­ri­ties now needs to aug­ment its in­vestor pro­tec­tion fund from 1 per­cent of rev­enue to 3 per­cent. It said it will beef up its in­ter­nal checks and com­ply with rules.

Shen­wan Hongyuan Se­cu­ri­ties said in a note that bro­ker­ages can com­pete fairly only when they all op­er­ate based on the rules and law. The down­grades, it said, sug­gest the mar­ket reg­u­la­tor is strength­en­ing com­pli­ance and risk man­age­ment -- and crack­ing down on mis­be­hav­ior, and dis­hon­est and il­le­gal prac­tices.

A down­grade may af­fect a bro­ker­age’s busi­ness ac­ti­tiv­i­ties such as in­vest­ment bank­ing. Bond is­suers gen­er­ally do not pre­fer to hire low-ranked bro­ker­ages as un­der­writ­ers, par­tic­u­larly when other higher-rated ones bid for the same role, said Yin Jian­jun, a re­searcher with Shang­hai-based Shenda As­set­Man­age­ment.

Stricter com­pli­ance re­quire­ments and fluc­tu­at­ing mar­ket con­di­tions will likely hurt the prof­itabil­ity of bro­ker­ages in the sec­ond half of 2016, ac­cord­ing to a re­search note from China Mer­chant Se­cu­ri­ties.

Eq­uity mar­ket is go­ing to be more ac­tive in the sec­ond half of 2016 with more chan­nels an­tic­i­pated to open to in­vestors, such as Shen­zhen-Hong Kong stock con­nect, and more IPOs. New is­suance of stocks and bonds will cer­tainly ben­e­fit larger play­ers in the sec­tor, China Mer­chant said in the note.

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