Battle of the bourses

When the Shanghai Stock Exchange (SSE) banged its opening gong on December 19, 1990, trading on the Shenzhen Stock Exchange (SZSE) had already been underway for more than two weeks.

Strictly speaking, the SZSE was operating a black market. Because Beijing leaders were backing Shanghai (former President Jiang Zemin and Premier Zhu Rongji were both promoted from Shanghai), the SZSE wasn’t given an official licence to trade until July 1991.

The battle to become China’s leading bourse hasn’t stopped since. The rivalry escalated in 1996 after trading volumes in Shenzhen overtook Shanghai for the first time. The following year a State Council investigation discovered that the Shanghai municipal government had been giving cash to broker Shenyin Wanguo to boost its bourse’s turnover. Kan Zhidong, then Shenyin’s president, has admitted in his autobiography that he even suspected that the SSE was manipulating Shanghai stocks so that it could outperform the SZSE. But Shenzhen officials were doing the same. The Shenzhen Development Bank, an index heavyweight listed on the city’s exchange, was likewise penalised for speculating in its own shares to drive up trading volumes.

The scandals saw both local governments lose oversight of their respective stock markets. Instead they were put under the supervision of the China Securities Regulatory Commission. Under the new arrangements, a pattern emerged: Shanghai became the de facto venue for bigger listings, particularly of state firms. Small and medium-sized enterprises in turn tended to go public in Shenzhen.

Recently that division of the spoils has been good news for the SZSE. Government policies to encourage the private sector in the economy have seen investors switch out of large-cap state firms into smaller, more entrepreneurial plays. Thanks to its buzzing sub-bourse ChiNext (see WiC208), the SZSE’s trading volume again outpaced the SSE last year. Additionally, the size of new fundraisings in Shenzhen’s primary and secondary markets have both exceeded those in Shanghai since 2011.

But now it would seem that Beijing is tipping the competitive dynamic back in Shanghai’s favour.

How else to interpret a new trading programme jointly announced by the CSRC and Hong Kong’s stock regulators earlier this month? The so-called Shanghai-Hong Kong Stock Connect, to be launched in October, is set to allow two-way investment between the SSE and its Hong Kong counterpart, the HKEx. The new arrangements could be worth up to Rmb550 billion ($88 billion) in annual quota.

“This is a solid step for China’s capital market to go global, a goal to which it has aspired since the early 1990s,” commented Beijing Review, the oldest state-run English weekly.

The idea, better known as the “through-train” scheme, is not new. In 2007, an announcement that mainland individuals could buy Hong Kong stocks on their local exchanges sent the Hang Seng index to an all-time high. But the excitement was shortlived. The plan was soon scrapped due to the complicated logistics of managing the cross-border capital flows.

Since then, market analysts have suggested that a new scheme pairing the Hong Kong and Shenzhen bourses would make more sense because of their geographical proximity. So when it was announced that the through-train would run directly to Shanghai instead it came as an unpleasant surprise for Shenzhen’s supporters.

“The central government’s support for the SSE is written all over the Shanghai-Hong Kong Stock Connect,” Southern Weekend believes. “The SZSE is at Hong Kong’s doorstep but it couldn’t board the through-train.”

In an implicit recognition that that the central government hasn’t been neutral in its handling of the two exchanges in the past, the CSRC said last week that IPO candidates could opt freely between Shanghai and Shenzhen. But the South China Morning Post reports that the watchdog’s officials “are privately lobbying IPO applicants to give priority to the Shanghai exchange”. Citing sources close to the CSRC, the SCMP says more than 30 firms have changed their listing venue as a result, as the regulator wants to bring the number of IPO applicants in Shanghai to 300.

One of those which has announced its intent to list in Shanghai is China National Nuclear Power. If it raises its targeted Rmb16.25 billion ($2.6 billion), the IPO will be the country’s largest since August 2010.

By early April, 169 companies were in the queue to go public in Shanghai. (Then again, Shenzhen has 513 listing candidates.) CBN Weekly notes that a CSRC spokesperson said the regulator would “balance the participation between the SSE and the SZSE” when vetting IPOs in future.

The CSRC’s intervention has triggered criticism from experts, including former China Banking Regulatory Commission Chairman Liu Mingkang.

“It has been too obvious that Shenzhen’s financial market has long been suppressed by people at the top. Or else the SZSE could have gone much further,” the Hong Kong Commercial Daily quotes Liu as saying at a meeting this month on the development of Qianhai, a special economic zone between Shenzhen and Hong Kong (see WiC157).

The central government should allow fairer competition between the SSE and SZSE, agrees Southern Weekend. But the newspaper says Beijing wants to liven up investor sentiment in Shanghai, where the index heavyweights are clustered. The Shanghai Composite, the key index of Chinese stocks, is down 5% year to date. Boosting the market is also one of the goals of the through- train scheme.

In overseas markets, stock exchange competition is nothing new and has sometimes resulted in mergers intended to create global giants. Chinese think-tanks have contemplated the same course for Shanghai and Shenzhen. At a conference in 2011, Qi Bin, director of the CSRC’s Department of Innovative Business Supervision, talked up the potential of a mega stock exchange that merged the mainland’s two bourses with those in Hong Kong and (eventually) Taiwan. But even Qi reckoned such a consolidation was “more than a decade” away.

Paradoxically, the biggest beneficiary of the through-train might be Hong Kong, rather than either Shenzhen or Shanghai.

With mainland investors thought to be keen to diversify out of China A-shares and into Hong Kong-listed blue chips, there is some expectation that local trading volumes could surge after October when the through-train is planned to launch. Jeffrey Chan, the chairman of the Hong Kong Securities Association said turnover could grow “at least 20%” to about HK$85 billion ($10.96 billion) a day.

Bankers told the South China Morning Post that increases in liquidity would also lure more companies to list in the city too.

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