The Shenzhen-Hong Kong Stock Connect program marks a milestone in China’s efforts to open up its financial markets.
It is interesting to note that Beijing chose to make an announcement before the G20 Hangzhou summit and the official inclusion of the renminbi into the SDR basket.
The timing of the approval shows that China is determined to push ahead with capital account liberalization and RMB internationalization.
The new stock link marks the resumption of China’s financial market reform. Now, I’ll discuss a few points about how the initiatives may impact the Hong Kong stock market.
Since 2008, loose monetary policy has been the global norm. Central banks in Europe, US and Japan have resorted to quantitative easing while China’s M2 money supply also kept growing at double-digit pace.
The liquidity spike led to capital flowing into various asset classes, ranging from currencies and commodities to equities and bonds, and exacerbated market volatility.
Several developed countries now even have negative interest rates. Huge amount of capital is sloshing around the world seeking return. In addition, emerging markets benefited from inflows following the Brexit vote.
As one of the cheapest markets, Hong Kong stands to benefit too. The launch of the Shenzhen stock link program will boost demand for Hong Kong-listed shares.
The renminbi’s depreciation has created a strong need for mainland Chinese investors to diversify into other assets.
Amid this situation, the upcoming new cross-border stock link should prompt the investors to take a fresh look at the Hong Kong stock market.
As of the end of last year, there were a total of 951 H-shares and red-chips in Hong Kong, making up 62.1 percent of the total market capitalization on the local bourse. And the Chinese firms accounted for 72.7 percent of the total market turnover.
Meanwhile, various Chinese financial and non-financial institutions have accelerated their expansion pace in Hong Kong amid Beijing’s RMB internationalization and “One Belt One Road” push.
Numerous Chinese brokerages, private-equity firms and family fund management companies have set up offshore branches in Hong Kong.
In the last couple of years, I have seen quite a few of my friends leave foreign institutions to either start their own funds or join Chinese financial institutions.
Their comprehensive experience in financial product development, management, marketing and trading will help Chinese financial firms to expand their market share in the long term.
All these changes mean more Chinese investors and financial institutions may begin to follow, participate in and influence the Hong Kong market.
Cross-border mergers and acquisitions could also become more common.
We’ve seen such deals earlier under the Shanghai-Hong Kong Stock Connect, with one example being the acquisition of Digital China Holdings (00861.HK) by China’s GRG Banking Equipment.
This article, published in the Hong Kong Economic Journal on Aug. 24, was contributed by Yao Jie, Senior Vice President of Strategy & Investment at VST Holdings Ltd.
Translation by Julie Zhu
[Chinese version 中文版]
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