Hong Kong: China will start its second stock-trading link with Hong Kong on Dec. 5, another step in the country’s efforts to open up the mainland market.
The Shenzhen-Hong Kong connect will give investors in the city access to stocks on the Shenzhen Stock Exchange, where many Chinese technology companies are listed. The program has been awaited for more than two years following the launch of the Shanghai-Hong Kong connect in November 2014.
The link’s start was announced by regulators amid the yuan’s biggest monthly decline against the US dollar since a one-time devaluation in August last year. The Shanghai and Shenzhen connections are a key part of China’s push to internationalise its currency and should also help the country’s stocks integrate into the world’s markets. When MSCI Inc. in June rejected the nation’s shares for inclusion in its global benchmarks, among the issues it cited were barriers facing foreign investors wanting to trade in China.
“We’re ready for another milestone in our mutual market access initiative,” Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd., said in a statement. “Shenzhen connect will open up another mainland market for international investors, give investors on both sides of the boundary more choices and enhance access to the mainland’s stock market through our market and to our market through the mainland market.”
China has been slowly improving market access and gradually easing restrictions on money flow. In February, authorities removed limits on foreign involvement in the country’s interbank bond market, while Bloomberg News reported in September that officials had scrapped guidelines on Qualified Foreign Institutional Investors’ mainland asset allocations.
Investors buying into Shenzhen will have access to any stock in the Shenzhen Stock Exchange Component Index and Shenzhen Stock Exchange Small/Mid Cap Innovation Index that has a market value of more than 6 billion yuan, according to an August presentation from Hong Kong’s Securities and Futures Commission. Any company that is dual listed in the city and Hong Kong will also be available. Buying shares traded on Shenzhen’s ChiNext small-cap gauge will be limited to institutional investors at the “initial stage” of the link, the SFC said.
The Shenzhen Composite Index has been volatile. The index was among the top global performers last year, gaining 63 per cent. The city’s benchmark gauge is down 7.8 per cent this year.
Regulators in August announced approval of the second connect and also removed aggregate quotas between the city and mainland equity markets. The daily total trading limits for each link will be 13 billion yuan ($1.9 billion) for orders going north and 10.5 billion yuan for southbound flows.
May Tan, chief executive of Standard Chartered in Hong Kong, said in a statement the bank has seen strong interest from local retail clients and overseas institutional investors since the approval of the second link in August.
The connection to Shenzhen is a “positive step from the standpoint of index managers and their clients, and increases the chances of affirmative decisions on their part in their reviews over the coming year,” Nick Ronalds, managing director for equities at the Asia Securities Industry and Financial Markets Association in Hong Kong, said before the announcement.
The link with Shanghai hasn’t been as popular as authorities may have hoped, with investors rarely hitting the daily limits. Global investors sold a net 3.51 billion yuan of mainland shares using the existing link between Shanghai and Hong Kong in the first half of November, even as China’s benchmark equity gauge climbed into a bull market.
The Shenzhen link “reduces foreign investors’ reliance on QFII, thus relieving the difficulty of hedging renminbi, which has been increasingly volatile of late,” Tony Cheung, head of quant analytics at Liquidnet Holdings Inc. in the Asia Pacific region, said by email. “This reduces the costs of investing in Shenzhen and should ultimately translate into cheaper fees paid by end investors. For example, ETF management fees will be lower.”
Hong Kong’s government welcomed Friday’s announcement of the start of the link.
“We will closely monitor its implementation so that it will contribute to the economic and financial reforms of our country and reinforce Hong Kong’s position as an international financial centre,” the city’s financial secretary John Tsang said in an emailed statement.