A similar measure linking Hong Kong, which is Chinese territory but has a financial system that is open to foreign investors, with the Shanghai exchange was launched in 2014.
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Indeed, China’s notoriously speculative markets were little fazed by the news, with Shenzhen ending only modestly higher and Hong Kong stocks slipping.
Foreign investors have long eyed the Shenzhen stock exchange, one of the largest in the world, as a hot spot for tech, solar and drug companies spearheading innovation and growth in China.
By giving the green light to the final links of an ambitious plan to connect Hong Kong to China’s mainland markets – giving foreign investors more exposure to Chinese stocks – Beijing appears to strengthen its case for the inclusion of Chinese shares in global index providers such as MSCI. The CSI 300 Index of the biggest companies traded in Shanghai and Shenzhen shed 0.15 percent to 3,373.05 points.
HKEX and SFC have said around four months will be needed to complete preparations and testing of the new link.
Meanwhile, Hong Kong’s Hang Seng Index HSI, +0.20% was up 0.3%, and both the Shenzhen Composite Index 399106, +0.30% and the start-up focused ChiNext Index added 0.2%.
The program will also take advantage of the close geographic position of Shenzhen and Hong Kong, and enhance cooperation between the mainland and Hong Kong, Keqiang said. But the Shanghai-Hong Kong link has proven hugely popular with foreign investors, who bought the maximum number of shares allowed in its first few days. “We expected the Shenzhen-Hong Kong Connect for a long time”, said William Cheung, an analyst for regional strategy at Kim Eng Securities. Its average daily turnover ranks behind only the New York Stock Exchange, according to data from the World Federation of Exchanges.
For China, this is more about further opening up its financial markets and integrating it with Hong Kong as well as the worldwide community. It wants to prove to global investors that it is making progress towards removing barriers for them to tap China’s US$ 6.5 trillion equity market.
The announcement specified that the number of stocks to be included in the Shenzhen stock connect will be linked to how many Shenzhen-listed firms have a market value of at least 6 billion yuan (US$ 905 million) and how many firms listed in Hong Kong have a market valuation of at least HK$ 5 billion (US$ 645 million).
The People’s Bank of China’s latest report showed that by the end of 2015, the RMB had become the third most-used currency in cross-border trade and financing.
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The main difference between the two channels will be that Shanghai has a quota on both daily and yearly trade totals, while only a daily quota is planned for Shenzhen. The China Securities Regulatory Commission also lifted restrictions on asset flows, saying it won’t impose an aggregate quota for the Shenzhen link, and that it will remove the existing cap on the Shanghai program.
