22 August 2019
After some initial excitement, investor enthusiasm has faded for the Shanghai-Hong Kong Stock Connect program. Photo: Bloomberg
After some initial excitement, investor enthusiasm has faded for the Shanghai-Hong Kong Stock Connect program. Photo: Bloomberg

Stock link not a gift; outlook far from exciting

The Shanghai-Hong Kong Stock Connect was launched with much fanfare on November 17 but the momentum soon fizzled out during the week, with both northbound quota (a daily cap of 13 billion yuan for overseas investors in the Shanghai bourse) and southbound quota (10.5 billion yuan for mainland investors in Hong Kong) being substantially underutilized.

The northbound quota was used up on the first day, but the turnover nosedived to just 29 percent of the quota on Tuesday as calculated on a net basis and further to 20 percent Wednesday.

The through-train scheme brought in even less transactions to the Hong Kong bourse, filling just 17 percent of the southbound quota on the day of launch. The turnover waned to four percent Tuesday and 2.4 percent Wednesday.

The anticlimactic market reaction and widespread short-selling activities were something not expected by policymakers, and mark a slap in the face of Beijing mouthpieces’ propaganda about what the bourse link would deliver.

Then comes the blame game: the Occupy participants are accused of spoiling the market rapture and marring Beijing’s benevolent offer.

Global Times, a sister publication of the People’s Daily, noted in an editorial Tuesday that “Hong Kong just sits there and expects policy blessings but the central government is unable to spoon-feed Hong Kong (中央政府並無法把送上門的飯再餵到香港嘴裡)”. And it went on to say that some people in Hong Kong are “good-for-nothings (扶不起的阿斗)”.

First of all, the bourse link shouldn’t be viewed as another “generous gift” to Hong Kong by the central authorities.

Rather, from day one, the bourse link was designed to channel capital from Hong Kong.

The intention is apparent if we look at how quotas are set: northbound quota is 2.5 billion yuan more than the southbound one and if both quotas are used up, a total of 600 billion yuan will flow into the mainland annually given that there are roughly 240 trading days per year.

The amount can bear comparison to the Chinese central bank’s two rounds of “quantitative easing” in September and October in which 770 billion yuan of liquidity was injected into the economy. In this sense the scheme is indeed Beijing’s financial tool to maintain market stability; and the benefits it may bring to Hong Kong is but a “side effect”.

The bourse link is among a set of key initiatives to expedite China’s capital market reforms but Beijing changed its tone when the Occupy movement started, claiming that the scheme is a gift of goodwill to the territory.

The fact that the bourse link is being spoken of in the same breath as when Hong Kong renewed a water supply deal with Guangdong shows how a business deal is being turned into something like alms to the poor that all Hongkongers must feel grateful for. Hong Kong pays an average price that is 200 times higher than that in a similar water supply deal between Singapore and Malaysia. And factoring in water treatment costs, the price we pay is twice the cost of seawater desalination in Taiwan.

As for the question as to why the stock link program was off to a poor start, as renowned financial commentator Cho Yan-chiu noted in the Hong Kong Economic Journal, the reason is that both Hong Kong and the mainland markets have priced in the new policy in the past months as related news and rumors had been there for more than half a year.

The reason why the northbound quota was used up on the first day was because overseas institutional investors wanted to sell some H shares and buy A shares to take advantage of the valuation gap between the Hong Kong and Shanghai bourses in some blue chips. These major players do not have to alter their portfolios but can conveniently monetize the difference in share values.

Now, what about the medium term impact of the scheme?

Given the fact that China is struggling with economic restructuring, overseas or Hong Kong investors generally may not be too excited about investing in A shares at this stage.

Especially as many of China’s state-owned enterprises are plagued with problems, and as the policy to invite private capital participation is seen as a conspiracy to ask the non-state sector to foot the bill.

Meanwhile, with regard to southbound trade, Hong Kong economy’s growing dependence on China reduces the appeal of local shares to mainland investors as they look to diversify their assets.

So even in the longer term, we cannot expect too much from the scheme.

This article appeared in the Hong Kong Economic Journal on Nov. 20.

Translation by Frank Chen

– Contact us at [email protected]


Former full-time member of the Hong Kong Government’s Central Policy Unit, former editor-in-chief of the Hong Kong Economic Journal

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