Shenzhen-Hong Kong Stock Trading Link Gets Green Lightby and
Decision comes after MSCI chose not to add China to benchmarks
Hong Kong exchange to host press conference at 9 p.m.
The long-planned stock-trading link between Hong Kong and the mainland city of Shenzhen has been approved, a step toward opening China’s $6.5 trillion equity market to international investors.
Chinese Premier Li Keqiang announced the State Council’s endorsement, according to a statement on the body’s website. No further details were revealed. Authorities are planning to not set a quota for aggregate trading through the link between the two cities, according to two people familiar with the matter. Hong Kong Exchanges & Clearing Ltd. said it will hold a press conference at 9 p.m. local time.
Foreign investors, who currently have to obtain their own quotas from China’s government to buy Shenzhen equities, are waiting for details on which stocks will be traded through the link and what restrictions will apply to their purchases. They had expected the gateway to the nation’s technology-focused exchange to open last year, with officials holding off amid fallout from the summer’s $5 trillion equity rout. The Shenzhen Composite Index is down 12 percent in 2016.
“The Shenzhen link has been rumored and eagerly awaited for some time,” said Sandy Mehta, chief executive officer of Hong Kong-based Value Investment Principals Ltd. “Many of our foreign investor client base has been on the lookout for Shenzhen stock opportunities in the hope that they can access this new market through the link.”
SGX FTSE China A50 Index futures rose 0.3 percent at 6:28 p.m. The news comes about two months after MSCI Inc. cited accessibility issues in deciding not to include mainland-listed shares in its global benchmark indexes, a blow to government efforts to raise the profile of the country’s markets and increase the international importance of the yuan.
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. Overseas investors can also trade in China, the world’s second-largest equity market, through quota-regulated qualified foreign investor programs.
Global money managers have been relatively slow to utilize the Shanghai link, taking up about half their quota for buying shares since the program began. Chinese traders have recently shown more appetite for investing in Hong Kong stocks, with net buying surging in June and less than 20 percent of the 250 billion yuan ($38 billion) quota left unfilled.
“In the short term, we think the positive impact is probably higher for Hong Kong stocks as they are cheaper, but in the long term, we think it’s good news for us," said Yang Nong, secretary of the board of Rastar Group, a toy car maker that’s listed in Shenzhen. “The entry of international investors will cause differentiation among the Shenzhen-listed companies and allow the cream to the rise to the top."
Tuesday’s announcement had been telegraphed by officials from the mainland and the city. On Aug. 11, the Hong Kong exchange’s head Charles Li told CNBC in an interview that the link with Shenzhen was “imminent.” Premier Li in March said the link would start this year. A person familiar with the matter said a year ago that China’s State Council had signed off on the plan.
“While there aren’t any details yet, the fact that the State Council approved the plan does show some progress from just indication of support or preparation,” said Mari Oshidari, a Tokyo-based senior strategist at Okasan Securities Group Inc. “Markets are likely to take this positively.”