Markets

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Foreign investors keen for a taste of China's new economy, tighten your seat belts.

A trading link between Hong Kong and Shenzhen, home to China's other major stock exchange and one of the world's most volatile bourses, is expected to start soon.

The tie-up will be a welcome reprieve for international money managers seeking a change from the staid banking and energy companies that dominate Shanghai, whose exchange was connected with the former British colony's a couple of years ago. Shenzhen stocks are more skewed toward China's vibrant services sector, and as such are more highly valued by investors chasing growth.

Premium Picks
Stocks on Shenzhen's exchange have long traded at a much higher price-earnings multiple than those in Shanghai
Source: Bloomberg

Playing Shenzhen stocks, therefore, means taking on more risk.

One reason is because the market is awash with individuals, small-time investors hoping to make a quick profit. As much as 59 percent of Shenzhen's bourse is in retail hands, versus about 34 percent in Shanghai, Goldman Sachs Group Inc. research shows.

That means two things: more margin financing, or borrowing to fund stock purchases, and lots of "stir frying," the expression used to refer to the frequent buying and selling of equities in China.

It's not like Shanghai investors aren't flip happy themselves. Turnover velocity, or the number of times on average a stock is traded in a year, is more than five times in Shanghai, compared with 0.8 in Hong Kong. (That should worry Londoners who may see a trading link with Shanghai at some point.)

But in Shenzhen, stocks are turned over almost nine times a year, giving the exchange the distinction of having the world's highest turnover velocity.

Share Stir-Fry
Shenzhen stocks have an average turnover velocity of almost 9 times
Source: Goldman Sachs Research

Shenzhen's stocks are surely alluring, especially considering how disappointing the trading pipe with Shanghai has been, with the amount of money leaving China well above what's coming in. The buying spurt prior to summer of Shanghai-listed bank stocks dried up after investors began paying more attention to lenders' bad-loan data.

Lacking Luster
Net buying of Shanghai stocks on the Connect trading link with Hong Kong has dwindled
Source: Bloomberg

Shenzhen offers companies that are popular with investment-banking analysts and that have interesting stories, like liquor maker Wuliangye Yibin Co., video surveillance firm Hangzhou Hikvision Digital Technology Co., and even Wanda Cinema Line Co., tycoon Wang Jianlin's bet on China's box office overtaking the U.S.

Here, volatility is the name of the game.

Rocky Road
Investment-bank analyst Shenzhen stock picks include Wuliangye, Wanda Cinema and Hikvision. The one thing they have in common? Volatility
Source: Bloomberg

Wanda Cinema, which according to analysts surveyed by Bloomberg has 11 buy calls, two holds and one sell, went from market darling to struggle street in a matter of months as movie takings slowed over the summer.

When it arrives, the Shenzhen-Hong Kong connect will be a boon to all those foreigners wanting access to China's fast-growing healthcare, consumer and tech firms without pre-approved quotas. But whether it will prove a case of out of the frying pan and into the fire is another matter.

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

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net