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http://www.ft.com/fastft/2016/08/16/chinas-state-council-approves-shenzhen-hk-market-linkup/
MARKETS
China’s State Council approves Shenzhen-HK market linkup
2 hours ago
Beijing has just signalled that a long-awaited trading link between Shenzhen stocks and Hong Kong’s market is set to open before the end of the year – roughly two years on from the milestone launch of a link with Shanghai.
The so-called “Connect” will for the first time allow international investors to trade stocks listed in the southern city, home to many more tech and start-up enterprises than Shanghai, which is known for hosting a greater proportion of state-owned enterprises and banks – neither of which are particularly popular with international investors just now.
“Preparatory work related to the Shenzhen-Hong Kong Stock connect is basically completed, and the State Council has approved a ‘Draft Plan for Implementation of the Shenzhen-Hong Kong Stock Connect’,” Premier Li Keqiang said in a statement.
The Shenzhen link has long been expected by the market, with Hong Kong regulators and the exchange saying they are ready. Final testing and preparatory work is expected to take roughly another three months. That would allow the link to open as soon as November.
China economist Chen Long at Gavekal Dragonomics said “appetite will only be gradual” for Shenzhen shares, pointing out that, by his estimate, only half of the Shanghai Connect’s quota had been used in the more than two years since its launch. But he added that investor appetite would be better than it has been for Shanghai because Shenzhen’s small-caps have historically given better returns.
Hao Hong, chief strategist and co-head of research at Bocom International, noted the latest statement was short on key specifics. “Hopefully we’ll see more details in the coming days regarding the quota, daily limits, who can participate, etcetera,” he said.
Mr Hong said the linkup was another significant step in connecting three exchanges from two parts of China, but cautioned that “short term, there could be profit taking based on the news once all the details come out.”
Hong Kong stocks have rallied in recent days in hope that an announcement was imminent. The Shanghai Connect works in both directions, providing mainland investors with their only direct access to an international market as well as allowing foreign money to flow north.
Both southbound and northbound flows are subject to quota caps, but neither requires individual approval of each investor, as previous investor schemes, such as QFII, have.
“[The Shenzhen-Hong Kong connect] has two positives: the first is it shows that this period of worry in Beijing about currency outflows has passed,” said Erwin Sanft, a regional strategist at Macquarie. “But in a more practical way, it opens up increased access to the China market.”
In the official statement Mr Li said the Shanghai-Hong Kong connect had “successfully laid the foundation for the rolling out of the Shenzhen-Hong Kong connect, signifying that China’s capital market has once more taken a substantial step forward in terms of legalisation, marketisation and internationalisation with many positive implications.”
As of market close the Shenzhen Composite Index’s market capitalisation stood at 3.33tn dollars.
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