24 March 2019
Brokerages will benefit from the cross-border market access scheme but its overall impact on Hong Kong and Shanghai is less certain. Photo: Bloomberg
Brokerages will benefit from the cross-border market access scheme but its overall impact on Hong Kong and Shanghai is less certain. Photo: Bloomberg

Winners big and small in cross-border stock market link-up

It’s official. Shanghai and Hong Kong are linking their stock exchanges, allowing investors in these cities to directly invest in each other’s stock market in about six months.

In a joint statement Thursday, the China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission said the mutual market access mechanism between the Shanghai Stock Exchange and Hong Kong Exchanges and Clearing Ltd. (00388.HK) has been approved in principle with an initial quota of 550 billion yuan (US$88.5 billion).

So who is going to benefit from the scheme?

Brokerages on both sides of the border are obvious winners. Guotai Junan International (01788.HK) soared 25.9 percent at one point Thursday and China Galaxy Securities (06881.HK) shot up nearly 10 percent. CITIC Securities (600030.CN), China’s largest brokerage by market capitalization, rallied 9.7 percent and Huatai Securities (601668.CN) racked up more than 6 percent.

HKEx, which was suspended from trading pending the announcement, should also stand to gain.

In a note to clients, JP Morgan said major tech stocks such as Tencent (00700.HK) and Lenovo (00992.HK) could be tempting targets for investors as such large-cap internet plays are not available in the mainland market. With wider choices to invest in specific stocks, investors could make them their favorite picks.

For instance, Tencent started to climb in the afternoon and ended the day 7.5 percent higher to become the best performing blue chip. Lenovo picked up nearly 5 percent.

Also, gaming stocks, which are exclusive to Hong Kong, will gain from the tie-up.

While specific sectors or companies may see greater benefits, the potential impact on the overall Hong Kong market is less certain.

Chief Executive Leung Chun-ying {梁振英} called the tie-up good news for the financial sector and the stock market, especially amid a slew of macro factors such as China’s economic slowdown and tapering of economic stimulus by the United States Federal Reserve.

As for the Shanghai market, there may not be a lot to gain, at least initially. Just because Hong Kong investors will be able to directly buy Shanghai-listed stocks does not mean they will do so.

Mainland stocks have been a non-starter for investors for years. Amid an economic slowdown and overcapacity, many old-economy plays such as steel mills and banks won’t be appealing to outside investors.

What’s more, the quality of A shares is doubtful given concerns about problematic accounting practices and fraud. The mainland’s initial public offering market was suspended in October 2012, mainly for those reasons which had the effect of suppressing market sentiment.

The Shanghai Composite Index has lost 6 percent since the beginning of 2013. In contrast, Hong Kong’s benchmark Hang Seng Index has gained 2.4 percent and the US S&P 500 index is up more than 30 percent during the period.

The tradable limit for Hong Kong stocks in the cross-border scheme is 250 billion yuan, with a daily limit of 10.5 billion yuan. The limit for Shanghai is 300 billion yuan, with a daily cap of 13 billion yuan. Investors can invest in all listed stocks in Shanghai and Hong Kong.

Institutional investors and retail investors with securities accounts or capital accounts with balances of more than 500,000 yuan can tap the markets through this new channel. Mainland investors can invest in the Hong Kong stock market through local brokerages, and vice versa for Hong Kong investors.

– Contact the writer at [email protected]



EJ Insight writer

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