The new Shenzhen-Hong Kong Stock Connect will open by the end of this year, creating a second portal for foreign investors looking to access China’s $6.5 tn equity market.
Aggregate quotas for the Shanghai-Hong Kong Stock Connect, which was launched in November 2014, have been abolished as of August 16 and the new stock connect will have no aggregate quotas. Both the Shanghai and Shenzhen hook-ups will have daily quotas, however, according to the Securities and Futures Commission in Hong Kong.
The launch will interest investors seeking access to tech and retail stocks, with foreign investors likely having access to about 860 stocks in Shenzhen compared with 570 in Shanghai. Mainland Chinese investors will have access to about 420 Hong Kong-listed stocks, up from about 320 currently, according to Beijing-based news website Caixin.
Analysts say the move is welcome, although a major increase in fund flows into China is unlikely. ‘In the short term, I very much doubt this will drive significant flows into Shenzhen shares as a lot of stocks are expensive,’ Caroline Yu Maurer, head of Greater China equities at BNP Paribas Investment Partners, tells Caixin.
‘Our view is that it is another step for China to move away from quota-restrictive inbound investment channels toward an increasingly restriction-light environment,’ says Neil Flynn of Z-Ben Advisors in Hong Kong in an interview with IR Magazine.
The opening will give foreign investors access to a bigger range of equities in new industries, he adds. ‘These are notably different from the companies listed in Shanghai, where you tend to find older economy, larger and state-owned companies,’ he explains. ‘The Shenzhen exchange is more skewed toward the new economy – technology and healthcare – and a much larger proportion [of firms] are non-state-owned.’
Use of the Shenzhen Connect is likely to outstrip that of the Shanghai Connect, Flynn continues: ‘Northbound trading on the Shanghai Connect hasn’t been particularly strong – roughly 50 percent of aggregate quota. Shenzhen Stock Exchange trading volume is higher than in Shanghai. Also, if you look at the top QFII holdings of mainland equities by foreign managers, most are listed in Shenzhen.
‘There is clearly already strong demand for Shenzhen-listed equities from foreign investors. The Shenzhen Connect opens this up further.’
