Banking & Finance

A tale of two cities

Shenzhen Connect off to slowish start but one blue chip shines

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Turnover (top) and shares traded (bottom) as the Shenzhen Connect launched on Monday

The much hyped trading scheme linking Shanghai and Hong Kong’s stock market debuted in November 2014 with a whimper. Known as the Shanghai-Hong Kong Stock Connect, cross-border trading in the opening phase amounted to less than half of the regulatory quota.

However a rollercoaster ride soon followed: by mid-December Shanghai’s A-shares had gone into overdrive, surging more than 20% in a dozen or so sessions (see WiC264). The euphoria continued in 2015 and spilled over into Hong Kong by April (see WiC277) before a spectacular meltdown, dubbed “the Great Fall of China” (see WiC288).

Having nearly doubled in six months, the key index in Shanghai plunged 15% in the first week of June, and the Shanghai Connect was blamed for some of the volatility and speculative buying.

Could something similar happen with the Shenzhen-Hong Kong Stock Connect, which finally launched after many delays this week?

The Shenzhen scheme has – like its Shanghai peer – also had a similarly tepid opening.

As with Shanghai there is a daily quota capping capital flows – Rmb13 billion ($1.9 billion) for the northbound route from Hong Kong to Shenzhen and Rmb10.5 billion for the southbound route (see WiC337). But when trading kicked off on Monday, there was only Rmb2.7 billion worth of trades from international investors interested in Shenzhen stocks, or 21% of the ceiling. Opposite traffic was less, taking up only 10% of the cap.

“The second through-train is off to a slow start,” China Daily reported on its front page on Tuesday before adding that most analysts think that cross-border flows would become more robust once investors get over the adjustment period.

“If Shanghai-Hong Kong Stock Connect is a first baby step, the Shenzhen-Hong Kong is the second. Now we can walk, and then we can run,” Charles Li, chief executive of Hong Kong Exchanges and Clearing (HKEx), assured reporters after the launch ceremony on Monday.

The trading scheme is another key policy as Chinese regulators start to loosen their grip on the renminbi and Li told Sina Finance that it is just “a matter of time” before the quotas on the Shanghai Connect and Shenzhen Connect are scrapped.

Because of the proximity between Hong Kong and Shenzhen, Southern Metropolis Daily has suggested that the Shenzhen Connect will see higher capital flows in future than its counterpart programme in Shanghai.

“Investors in Shenzhen generally have a deeper understanding of Hong Kong equities. At least they can easily access Hong Kong’s financial media and TV shows in Shenzhen. [The broadcasting signal for Hong Kong’s terrestrial channel TVB filters across the border. No other Chinese province receives this channel.] And many Shenzhen people speak Cantonese too,” the Guangzhou-based newspaper claimed.

Regional rivalry also plays into the equation. One of the worst kept secrets in banking circles is that regulators have been supporting Shanghai’s ambitions as a financial hub with preferential policies. For instance, Shanghai was allowed to open the country’s first stock exchange in 1990, while the Shenzhen Stock Exchange wasn’t given the official nod until July the following year.

Likewise, Shanghai got a two-year head start in piloting the Stock Connect scheme with Hong Kong.

Both cities will want their investment flows with Hong Kong to be the largest. That said, for the time being the Shenzhen government is sticking to the official line. “The Shanghai Connect has given us invaluable experience over the past two years. What matters most is not trading volume but a healthier and more stable stock market to help our country’s economic reform,” the Shenzhen Economic Zone Daily suggests.

As regular WiC readers will know, the market in Shanghai is heavily skewed towards state-controlled giants and financial stocks. Many of the same companies have also gone public in Hong Kong. The situation in Shenzhen is different, with fewer state-controlled enterprises and fewer dual-listed stocks with Hong Kong.

Under the new trading scheme, international investors (via Hong Kong) are allowed to invest in 880 Shenzhen-listed companies (there are about 1,800 firms on the Shenzhen bourse in total). Many of them are private-sector firms that epitomise China’s ‘new economy’, such as Wanda Cinema (the leading cinema chain), Midea (the largest white goods maker, but which is now moving into robotics) and Hikvison (a producer of surveillance devices, a boom industry in China).

“The northbound Shenzhen trading link gives our global institutional client base the opportunity to buy stocks unavailable in Hong Kong and Shanghai, and hence get a wider exposure to China’s future growth,” said Rakesh Patel, HSBC’s head of equities for Asia-Pacific.

“We saw strong northbound flows into these ‘new economy’ stocks, particularly those in the technology and consumer sectors. We anticipate demand to increase in 2017, as investors grow more familiar with both the Connect programme and the range of stocks on offer.”

HSBC looks like another of the major winners for the opening phase of the new link to Shenzhen. According to Hong Kong’s Apple Daily, the first transaction via the southbound channel on Monday was a HK$25,000 ($3,223) deal to purchase HSBC shares.

And interest from Chinese investors via the new conduit has stayed strong. As of Thursday morning HSBC’s stock price had climbed as much as 7% for the week to a one-year high. Apple Daily noted that the bank has been one of the most actively traded stocks since the launch of the new channel.


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