The opening of the Shenzhen-Hong Kong Stock Connect, announced on November 25 by China’s and Hong Kong’s securities regulators, will allow investors outside China to invest on Shenzhen’s $ 3.3 trillion market via Hong Kong and mainland investors to invest in Hong Kong-listed stocks, including for the first time small-cap companies. The Hong Kong and Shanghai exchanges opened a similar link in late 2014.
China earlier this year opened its domestic bond markets more to foreigners.
The Shenzhen exchange – China’s highest-volume market – is home to many “new economy” companies in such sectors as health care and technology, which analysts say could prove more attractive to foreign investors than the large state-owned companies in slow-growth sectors that dominate the Shanghai exchange.
“Shenzhen in general offers investors many new-economy-oriented companies they weren’t able to get before,” said Alvin Li, ETF strategist at CSOP Asset Management, adding that investment through the two links would account for roughly half of a $ 3.2 billion fund he oversees.
Chinese stocks are on a strong run, with shares in Shenzhen up nearly 30% from a low at the end of January.
But the market in Shenzhen – a former fishing village that became a cornerstone of former Chinese leader Deng Xiaoping’s economic modernisation – also offers extreme volatility, in part because retail investors predominate. Last year shares began with a huge run-up only to fall by half in the space of three months.
High valuations could also put off investors. The Shenzhen Composite Index trades at about 50 times forecast earnings for the next 12 months, higher than the Shanghai index and nearly twice the Nasdaq 100 Index’s 25.49, according to Thomson Reuters.
Investors have been waiting for an opening date to be set since the approval of the link was announced in August. Concerns over the Chinese yuan’s decline against the US dollar may have held it up, analysts say.
Among the companies analysts point to as potential top Shenzhen picks are Hikvision, a video-surveillance provider, Wanda Cinema Line, the world’s biggest movie-theater operator, and Gree, a leading home-appliances maker. Shenzhen’s ChiNext, a Nasdaq-style secondary board for startups, will also open, but only to institutional investors.
While the focus for many outside China will be on the opportunity to buy mainland shares, the trading link could also encourage more Chinese people to invest in Hong Kong shares. The Shanghai-Hong Kong Connect, launched to much fanfare as a way of drawing foreign capital to Shanghai, has been used more by Chinese investors looking to buy shares outside the mainland.
“The market has been anticipating the launch of Shenzhen link for a fairly long time, so the immediate impact should be minimal,” said Zhang Gang, chief strategist at Central China Securities. But given the depreciation pressure on the yuan, he added, the flow into Hong Kong should continue over the long run.
Although there is no aggregate limit on the amount that can be invested via the new trading link, the daily limit for flows into Shenzhen will be 13 billion yuan ($ 1.88 billion); for flows into Hong Kong, 10.5 billion yuan.
Foreign investors will be able to trade 881 Shenzhen-listed stocks representing 71% of total market capitalisation, while mainland investors will be able to trade 417 Hong Kong stocks represent 87% of market capitalisation, according to statements from the Shenzhen Stock Exchange and Hong Kong’s Securities and Futures Commission.
The link paves the way for mainland-listed shares to be included in MSCI Inc.’s emerging-market index; given that the index is tracked by some $ 1.5 trillion worth of funds, that would likely draw tens of billions of dollars. The global index provider declined to include these so-called A-shares this June partly due to its concerns about limited foreign access.
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Yifan Xie in Shanghai contributed to this article, which was published by The Wall Street Journal