Cross-border yuan

Shenzhen-HK Stock Connect seen as plus to RMB flows

Financial analysts in Hong Kong reckon that the Shenzhen-Hong Kong Stock Connect, which will likely be launched in December, will facilitate larger and more balanced cross-border renminbi fund flows.

The second equity trade link between the mainland and Hong Kong, announced in mid-August by the China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission, would abolish an aggregate quota. The aggregate quota for the ShanghaiHong Kong Stock Connect, launched in November 2014, was also scrapped.

“Against this backdrop of strong two-way equity market flows, theabolishmentof overall quotas can be seen as an indication that the mainland’s capital account liberalization is maturing and policymakers are becoming more comfortable with the nature of crossborder foreign exchange flows and the renminbi’s outlook,” said a research report on Linda Csellak, emerging market from HSBC.

Though there is not an aggregate quota, the daily trading limits — 10.5 billion yuan and 13 billion yuan for the southbound and northbound channels respectively — are still applied on both the Shenzhen and Shanghai market trade links.

“Over time, webelieve these two-way investment schemes will enhance the renminbi’s role as an investment currency, foster healthy two-way flexibility in the exchange rate, currencies andhelponshoreandoffshore foreign exchange (renminbi) curves converge further,” the HSBC report added.

Linda Csellak, head of Asia Pacific equities at Manulife Asset Management, is more positive on the ShenzhenHong Kong Stock Connect than the Shanghai Hong Kong Stock Connect.

“There will be buying opportunities in small and mid cap companies, particularly in Hong Kong, with niche businesses at attractive valuations with scarcity value,” Csellak noted.

The Shenzhen trade link will offer offshore investors access to 880 stocks listed in Shenzhen, with the major bulk of beneficiaries being small and mid cap company stocks and technology shares. Mainland investors can gain access to trade 417 stocks listed in Hong Kong under the second stock connect program.

Adian Yao, senior emerging Asia economist at AXA Investment Managers, said the second equity market trade link would foster more balanced renminbi crossborder fund flows.

There will be buying opportunities in small and mid cap companies, particularly in Hong Kong.”

head of Asia Pacific equities at Manulife Asset Management