Investors who like roller coasters have a new ride. China, still cleaning up from its burst equity bubble, is opening a link to let foreigners buy shares on the Shenzhen Stock Exchange, its version of the Nasdaq Stock Market. Shenzhen, which is known for its technology and pharmaceutical companies, was the world’s best-performing stock market during the first half of 2015 before becoming one of the worst this year.
1. What is China doing?
China launched the Qualified Foreign Institutional Investors program in 2003. The program allows designated fund managers outside China to invest in companies listed in Shenzhen, a former fishing village close to Hong Kong that’s now a flourishing financial center. By connecting the Shenzhen and Hong Kong exchanges, China is providing a new investing channel to global traders, subject to daily quotas. The so-called Shenzhen-Hong Kong Connect follows a similar link started in 2014 between Hong Kong and Shanghai.
2. What’s China’s goal here?
Foreign investment in the mainland’s $6.5 trillion stock market is tiny and China wants to open it to the world. The country also aims to be part of the widely followed MSCI Emerging Markets Index. MSCI, which in June decided against adding China to its benchmark gauge, has expressed concerns about limited investor access to Chinese stocks. The index company supports the Shenzhen-Hong Kong tie-up.
3. What are financial markets saying?
The Shenzhen Composite Index is down 12 percent this year, though it’s risen 3.2 percent this week as expectations rose that an announcement was imminent. It’s worth keeping in mind that despite the initial excitement, the traffic through the Shanghai connect has rarely come close to hitting the daily limit.
4. Is this a case of buyer beware?
Investors around the world need to make sure they’re ready for China’s unique brand of market management. The government has shown a propensity to talk up the stock market -- the second-largest after the U.S. -- only to step in when shares tumble.
The Reference Shelf
— With assistance by Gary Gao, and Laurence Arnold