Markets

Matthew Brooker is an editor with Bloomberg Gadfly. He previously was an Opening Line columnist, an editor and a bureau chief for Bloomberg News. Before joining Bloomberg, he worked for the South China Morning Post. He is a CFA charterholder.

Hong Kong is in the grip of Shenzhen fever again. The city's benchmark Hang Seng Index rose as much as 3.4 percent in the morning session, the most in almost two months. Shares of the stock-exchange operator, Hong Kong Exchanges & Clearing, jumped more than 9 percent to the highest since August.

The trigger for today's exuberance was People's Bank of China Governor Zhou Xiaochuan, who mentioned in an article published on the central bank's website that a trading link between Hong Kong and the southern city would start this year. The central bank later said in a text message that Zhou's comments were taken from a speech on May 27.

Whether or not the link is poised to start soon, the market reaction looks overdone. It's a familiar story. HKEx rose the most in a month on Jan. 5, after Premier Li Keqiang said a stock link with Shenzhen should be established. The stock climbed again, along with the index, on May 8 after the State Council was said to have signed off on the plan. A week later, both jumped further on speculation the authorities were closer to announcing a start date for the link.

Then the small matter of a China stocks crash intervened, and the plan was put on ice. “Psychologically, this is not the time to talk a lot about mutual market access when you’ve just put out a fire,” HKEx Chief Executive Officer Charles Li said on Sept. 7. The bourse and the index fell.

Hong Kong stocks have long soared on hopes that links with mainland China's $6 trillion market would unleash a  trading bonanza, going as far back as the record high reached by the Hang Seng Index in 2007 (a peak that has yet to be reclaimed.)

The Shenzhen plan would expand a link already established with Shanghai, the larger of the two mainland markets, one year ago. The sober reality is that the Shanghai stock connection has been a letdown.

The mechanism allows an aggregate of 23.5 billion yuan ($3.7 billion) to be bought in both directions each day. The quota for northbound trades (buying Shanghai stocks from Hong Kong) has been fully used only once -- on the first day. The southbound quota has been filled only twice. Most days, the quota is barely touched:

The graph shows the amount of quota remaining in each direction each day, with zero indicating the allocation has been fully taken up. The value of daily trading through the Shanghai link has averaged less than $1.6 billion since it went live on Nov. 17,  or less than 12 percent of Hong Kong's average daily turnover over the same period.

Is there any reason why a link to the smaller market should deliver the treasure trove that Shanghai has so far failed to provide? Those waiting for a gravy-train trading windfall may be disappointed.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates previous version of this story to reflect PBOC statement.)

To contact the author of this story:
Matthew Brooker in Hong Kong at mbrooker1@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net