Shenzhen Link Will Include Small-Caps as Exchange Conducts Tests

  • Start date still `uncertain' as bourse does internal tests
  • Small-cap ChiNext shares are geared to China's `new economy'

Foreign investors are poised to gain greater access to the best-performing stocks in China.

The Shenzhen exchange will include small-cap ChiNext shares in its planned link with Hong Kong, Liu Fuzhong, vice director of strategy and international relations at China’s second-largest bourse, said in an interview on the sidelines of a conference in Shanghai. The Shenzhen exchange is conducting internal tests on link infrastructure, though the program’s start date is still “uncertain,” Liu said at the conference.

Investors have been clamoring for details on the Shenzhen connect amid concern that a $5 trillion rout in Chinese shares earlier this year would derail plans to expand the existing cross-border program with Shanghai. The ChiNext index -- used by local traders as a proxy for “new economy” companies in the technology and service industries -- has jumped 87 percent this year and is valued at levels more than four times higher than the Shanghai Composite Index.

“The Shenzhen link will include the stocks that represent the new economy, from Shenzhen’s main board, ChiNext and SME board,” Liu said. The link “is certain to happen and go on. What’s uncertain is the timing,” he said.

The specific list of companies included in the connect are still under discussion, Liu said. He declined to comment on whether the link will allow one-way or two-way flows with Hong Kong.

Policy makers have given few details about the timing of the program since China’s stock-market selloff started in June. The link may begin in the second half of the year, Hong Kong Chief Executive Leung Chun-ying said May 28. The city’s exchange operator had also outlined a similar timeframe, while a person familiar with the matter said in May that China’s State Council had signed off on the plan.

Timing Speculation

In a sign of how keenly investors are watching for news on the link, China’s stock market surged last week after the central bank published five-month-old comments from governor Zhou Xiaochuan that said the program would start in 2015. The central bank later said via text message that the comments were taken from a speech on May 27, before the crash in Chinese shares made a delay of the program more likely.

Officials have been reviewing plans to expand the exchange link to Shenzhen after starting the Stock Connect program between Shanghai and Hong Kong in November 2014. MSCI Inc. has said that giving foreigners more access to Shenzhen is key to getting the nation’s stocks included in global benchmark indexes.

Expanding the exchange connect would be part of China’s effort to link its financial markets with the rest of the world and boosting global usage of the yuan. The Communist Party’s next five-year plan calls for increasing the yuan’s convertibility by 2020 as authorities push for inclusion in the International Monetary Fund’s basket of reserve currencies.

— With assistance by Shidong Zhang

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