The addition of the Shenzhen Stock Exchange is a major step toward opening up the two mainland markets, said financial service experts.
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Foreign investors, who now have to obtain their own quotas from China’s government to buy Shenzhen equities, are waiting for details on which stocks will be traded through the link and what restrictions will apply to their purchases.
I’ve been living on another planet, what is Shenzhen Connect?
China’s State Council approved the long-awaited stock link between the Shenzhen and Hong Kong stock exchanges on August 16.
Has there been any changes for Shanghai Connect as well?
The Shenzhen market is smaller than Shanghai’s and many of its listed shares are in smaller technology and consumer-oriented companies.
The long-delayed second link, which had been expected for more than a year, is part of China’s efforts to internationalize its capital markets and increase its global influence to something more in line with the heft of the nation’s economy.
Capital outflows from the mainland will further weaken the yuan. It wants to prove to worldwide investors that it is making progress towards removing barriers for them to tap China’s US$ 6.5 trillion equity market.
The MSCI Emerging Markets index has roughly $1.5 trillion of active and passive assets benchmarked to it. “The entry of global investors will cause differentiation among the Shenzhen-listed companies and allow the cream to the rise to the top”. Net buying of Shanghai shares is capped at 13 billion yuan, while the limit for Hong Kong stock purchases is 10.5 billion yuan.
In this Monday, Aug. 15, 2016 photo released by Xinhua News Agency, an investor stares at a stock price board at a stock trading hall in Hangzhou, capital of east China’s Zhejiang Province. “Foreign investors will be looking again for stocks which they have not really been able to invest in before”. China shares have to be held onshore by the Hong Kong exchange on behalf of beneficial owners.
Will this new stock link program lift share prices?
The Shenzhen Composite Index is down 12 percent this year.
Securities regulators canceled the aggregate quota for the new program, but put the same caps on daily transaction volume as the Shanghai-HK mechanism, which amount to 13 billion yuan (1.96 billion US dollars) for northbound investment and 10.5 billion yuan for trading Hong Kong-listed shares.
It is only natural for China to choose Hong Kong as a bridgehead for private risk-capital investment because of its proximity and cultural compatibility when it comes to communication. But it did not say when.
Notably, China will abolish aggregate quota for both Shenzhen- and Shanghai-HK links, but certain restrictions continue to apply.
The overall trading quota of 550 billion yuan (US$83 billion) will be removed for both the Shanghai and Shenzhen stock trading links with Hong Kong, while the daily trading quota will remain, Charles Li, chief executive of regulator Hong Kong Exchanges and Clearing, said in a presentation.
The quota may be adjusted by the parties in light of actual operational performance.
Foreigners have used about half their 300 billion yuan ($US45 billion) total quota for buying Shanghai shares since the program began. Shares in Shenzhen were higher on Wednesday.
This can mean great investment opportunities – or a cause for concern – depending on where you are and how much risk you can take.
The China Securities Regulatory Commission (CSRC), the stock market watchdog, said on Friday that the programme will be launched this year, repeating comments a spokesman made in June.
Arbitrage investors can make money by exploiting the divergence in valuations.
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Still, KGI Fraser Securities trading strategist Nicholas Teo is keeping an eye on the Shenzhen market.
