23 August 2019
HKEx chief executive Charles Li believes the Stock Connect scheme will be expanded step by step. Photo: RTHK
HKEx chief executive Charles Li believes the Stock Connect scheme will be expanded step by step. Photo: RTHK

Shanghai-HK Stock Connect seen paving way for Shenzhen link

China could launch a cross-border trading link for the Shenzhen bourse as the Shanghai-Hong Kong Stock Connect, which kicked off Monday, has shown that there is strong demand for northbound trade from Hong Kong, according to a research analyst at Credit Suisse.

“The management of the Shenzhen Stock Exchange is lobbying very hard for the link,” analyst Vincent Chan said at a media briefing in Hong Kong Monday.

A Shenzhen link could come about within a year, he said.

Stock Connect, which allows international investors to trade shares on the Shanghai Stock Exchange via Hong Kong and mainland investors to access Hong Kong’s bourse via Shanghai, has proved that there is good appetite for mainland shares.

On the first day, northbound trade — people with Hong Kong accounts buying mainland stocks — vastly outstripped Chinese demand for Hong Kong shares.

By mid-afternoon, the entire 13 billion yuan (US$2.12 billion) daily northbound quota had been used, while about 83 percent of the 10.5 billion yuan daily quota for southbound trade was still available at the end of the trading day.

Chan said the much stronger demand for northbound trade, compared with that for southbound transactions, will continue for several years.

For international institutional investors, the Shanghai-Hong Kong Stock Connect has opened another door into the mainland, he noted.

“The funds under the management of global institutional investors are more than US$20 trillion, much larger than the total of about 1 trillion yuan held by their mainland Chinese counterparts… Therefore, even if the international institutional investors take out a little from their pockets and put it in the mainland market through the Stock Connect, the daily quota would be easily used up.”

Most of the institutional investors, especially small and medium-sized ones, had been blocked earlier from entering the A-share market because of the high thresholds in China’s Qualified Foreign Institutional Investor (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) schemes.

On the other side, although the numerous wealthy individual investors in the mainland hold a large amount of assets, the rich have actually been trading in the Hong Kong equity market via grey channels for years, Chan said. As for the ordinary mainland retail investors, it may take several years for them to overcome their doubts and hesitation about overseas markets, he said.

A possible reason why the central government decided not to delay the launch of Stock Connect, despite the Occupy protests in Hong Kong, is because Beijing wants the A-shares to be included in the MSCI’s global indexes in 2015, Chan said.

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EJ Insight reporter

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