Hong Kong Investors’ Wait to Trade Shenzhen Stocks Is Over

  • New connect will provide access to China’s technology hub
  • Move strengthens case for China’s MSCI inclusion, says HSBC

Shenzhen-HK Link to Start on December 5

Hong Kong investors will be able to trade on the Shenzhen Stock Exchange starting next week, ending a wait of more than two years for China to open a second equity trading link between the mainland and the city.

The next step in China’s efforts to open up its market starts on Dec. 5, with the Shenzhen-Hong Kong connect giving investors in the city access to many Chinese technology companies that are listed on the mainland bourse. The program follows the launch of the Shanghai-Hong Kong connect in November 2014. 

“We’re ready for another milestone in our mutual market access initiative,” Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd., said in a statement. “Shenzhen connect will open up another mainland market for international investors, give investors on both sides of the boundary more choices and enhance access to the mainland’s stock market through our market and to our market through the mainland market.”

The link’s start was announced Friday by regulators amid the yuan’s biggest monthly decline against the U.S. dollar since a one-time devaluation in August last year. The Shanghai and Shenzhen connections are a key part of China’s push to internationalize its currency and should also help the country’s stocks integrate into the world’s markets. When MSCI Inc. in June rejected the nation’s shares for inclusion in its global benchmarks, among the issues it cited were barriers facing foreign investors wanting to trade in China.

Opening Up

China has been slowly improving market access and gradually easing restrictions on money flow. In February, authorities removed limits on foreign involvement in the country’s interbank bond market, while Bloomberg News reported in September that officials had scrapped guidelines on Qualified Foreign Institutional Investors’ mainland asset allocations.

In a note published Friday, analysts at HSBC Global Research said the second link “significantly strengthens” the case for MSCI to include China’s stocks in its global indexes. HSBC said that the Shenzhen connect means international investors will have access to 1,400 mainland-listed stocks, known as A-shares, and will double the daily trading quota between the mainland and Hong Kong.

“Theoretically, investors can buy/sell $1 trillion of A-shares over 260 trading days, leaving the 20 percent monthly fund repatriation limit for Qualified Foreign Institutional Investors much less of a constraint in terms of capital mobility,” the analysts said. The monthly limit was cited as a reason for MSCI’s June decision.

Investors buying into Shenzhen will have access to any stock in the Shenzhen Stock Exchange Component Index and Shenzhen Stock Exchange Small/Mid Cap Innovation Index that has a market value of more than 6 billion yuan ($869 million), according to an August presentation from Hong Kong’s Securities and Futures Commission. Any company that is dual listed in the city and Hong Kong will also be available. Buying shares traded on Shenzhen’s ChiNext small-cap gauge will be limited to institutional investors at the “initial stage” of the link, the SFC said.

The Shenzhen Composite Index has been volatile. The index was among the top global performers last year, gaining 63 percent. The city’s benchmark gauge is down 7.8 percent this year.

Trading Limits

Regulators in August announced approval of the second connect and also removed aggregate quotas between the city and mainland equity markets. The daily total trading limits for each link will be 13 billion yuan for orders going north and 10.5 billion yuan for southbound flows.

May Tan, chief executive of Standard Chartered in Hong Kong, said in a statement the bank has seen strong interest from local retail clients and overseas institutional investors since the approval of the second link in August.

The connection to Shenzhen is a “positive step from the standpoint of index managers and their clients, and increases the chances of affirmative decisions on their part in their reviews over the coming year,” Nick Ronalds, managing director for equities at the Asia Securities Industry and Financial Markets Association in Hong Kong, said before the announcement.

The link with Shanghai hasn’t been as popular as authorities may have hoped, with investors rarely hitting the daily limits. Global investors sold a net 3.51 billion yuan of mainland shares using the existing link between Shanghai and Hong Kong in the first half of November, even as China’s benchmark equity gauge climbed into a bull market.

Easier Hedging

The Shenzhen link “reduces foreign investors’ reliance on QFII, thus relieving the difficulty of hedging renminbi, which has been increasingly volatile of late,” Tony Cheung, head of quant analytics at Liquidnet Holdings Inc. in the Asia Pacific region, said by e-mail. “This reduces the costs of investing in Shenzhen and should ultimately translate into cheaper fees paid by end investors. For example, ETF management fees will be lower.”

Hong Kong’s government welcomed the announcement of the start of the link.

“We will closely monitor its implementation so that it will contribute to the economic and financial reforms of our country and reinforce Hong Kong’s position as an international financial center,” the city’s financial secretary John Tsang said in an e-mailed statement.

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