HKedge over Shenzhen seen
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.