21 March 2019
Investor interest in the Stock Connect program will improve once a new link is established between Shenzhen and Hong Kong exchanges. Photo: HKEJ
Investor interest in the Stock Connect program will improve once a new link is established between Shenzhen and Hong Kong exchanges. Photo: HKEJ

HK-Shenzhen bourse link: Why it is important for China

The annual Boao Forum for Asia kicked off Saturday in China’s southern island province of Hainan, setting the stage for fresh debate over possible policy initiatives.

Among the topics in the market is the much-awaited Shenzhen-Hong Kong Stock Connect program, with observers wondering if mainland authorities will use the Boao event to give some clues regarding the timing of the launch of the new bourse link.

This is not surprising given that Premier Li Keqiang had used the same venue last year to make an announcement in relation to the Shanghai-Hong Kong Stock Link. That program was eventually launched in November 2014.

Now, the Shenzhen bourse link is drawing much interest as the program could have a much more significant impact, and help the city develop as a key financial hub along side its neighbor Hong Kong.

The upcoming cross-border trading program is set to cover the SME board and growth enterprise board in Shenzhen. Thus, investors’ focus will no longer be only on Shenzhen-listed bluechip stocks.

The new program has to take into account the unique characteristics of Shenzhen market as well as the weakness of the existing linkage between Hong Kong and Shanghai bourses.

It is unnecessary to expand the quota in the short term given that the investment quota has yet to be fully utilized for bluechip stocks covered in the Shanghai-Hong Kong Stock Connect. Therefore, regulators have to readjust their goals to test the market response again.

Meanwhile, one should bear in mind that international investors are less familiar with the SME board and growth enterprise board in Shenzhen. Hence, authorities need to do more education and promotion.

What investors care most is the future development path of the Shenzhen growth enterprise board. And they definitely do not want to see the growth enterprise board in Shenzhen grow into the same as Hong Kong’s second-board market.

Established in 1999, the second-board market in Hong Kong had a total of 208 companies as of February this year, with a total market value of HK$184.8 billion. The board had been aimed at helping newly created firms raise funds to develop their business.

In 2008, the Hong Kong stock exchange changed the listing requirements after conducting market consultation, and simplified the procedure for companies listed on the second board to transfer to the main board. That led the second board to be seen as a gateway to the main board.

However, the second-board became quiet after some initial frenzy during the dotcom boom at the turn of the last decade. In March 2005, the second board index was only a tenth of what it was when it was launched in 1999.

And the 2008 financial crisis dragged the index further down to 300 points. Currently, the index is hovering below the 500-points mark.

The Hong Kong stock exchange has raised the entry threshold in light of mixed quality of listed firms on the second board after adopting a registration system in the early stage. At the same time, it also simplified the approval process for listing on the second board in a bid to revitalize the market.

Premier Li Keqiang has repeatedly stressed the significance of innovation, which might be a hint for the future of mainland’s equity market.

Against this backdrop, the growth enterprise board is set to become a key focus.

As China is seeking to shift from an approval-based system to a registration-based one when it comes to new listings, it should pave the way for the growth enterprise board in Shenzhen to take off in the near future.

This article appeared in the Hong Kong Economic Journal on March 30.

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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