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December 6, 2016

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Market optimistic despite a slow start to Shenzhen-HK stock link

THE long-awaited stock link between Shenzhen and Hong Kong markets was launched yesterday, giving global investors access to some of the fastest growing tech-heavy shares in China’s mainland and mainland investors a route to hedge their yuan assets overseas.

On the first day of trading, only 21 percent of the northbound trade permitted under the scheme was taken up, while a little more than 8 percent of the southbound daily quota was used up. At the close, both markets ended lower. Hong Kong was down 0.26 percent, while Shenzhen’s composite index fell 0.78 percent.

The startup ChiNext board in Shenzhen rose 0.1 percent, while Hong Kong’s small cap index added 0.5 percent to buck the downturn trend of major markets.

The mainland’s benchmark Shanghai Composite Index lost 1.21 percent.

The link is similar to the existing Shanghai-Hong Kong Stock Connect, which was launched in 2014. The idea of Shenzhen-Hong Kong connect soon came up but was put on the back burner after the market crash of 2015.

The lackluster start to the scheme yesterday did not take industry experts by surprise.

“Investors were not expecting a spectacular open anyway, because investor sentiment is a little bit on the quiet side,” Hong Kong-based analyst Jackson Wong said.

That was mainly due to the weak yuan, said Wong, who is a securities analyst at Huarong International.

But he did say that the markets’ performance may improve once the currency stabilizes.

“I think (China) will roll out more relaxed policies and that would eventually trigger ... more buying interests.”

Others said the repercussions of the rout last year in mainland markets were still being felt. Concerns have been exacerbated by capital flight caused by the yuan, which is at eight-year lows against the US dollar.

Also, comments from Liu Shiyu, head of the China Securities Regulatory Commission, may have dented sentiment. Liu blasted hostile corporate takeover attempts between Chinese firms in a strongly worded speech posted on the regulator’s website.

Property developer China Vanke has been fighting to repel an acquisition by private conglomerate Baoneng Group, which would be China’s first blue-chip hostile takeover.

While saying some buyouts can be positive, Liu condemned those in which the suitor becomes “a barbarian, and then eventually a bandit.”

“The (market) drop is mainly related to (Liu’s) speech rather than the stock trading link launch,” according to Zhang Yufa, research director for private equity firm Million Tons Capital. “Market sentiment was affected by this.”

But Liu praised the new stock connect, saying it would “inject positive energy and instill confidence and trust in the international and domestic financial markets.”

Institutional investors will be the main beneficiaries of the new connect as both players — from the mainland and overseas — will be able to leverage on the gap between share prices on the exchanges.

“It’s all about China building institutional investment. It’s building insurance companies; it’s building pension funds; it’s building whole structures that we need for long-term investments,” said Mark Tinker, the head of Framlington Equities Asia at AXA Investment Managers.

As market insiders foresee more active trading by mainland investors with the cancelation of the aggregate quota, the link could also be seen as a channel to hedge the yuan assets and bring funds into China’s capital market.

“There is a growing demand for diversified investment amid a depreciating yuan among mainland investors,” said Frank Lee, acting chief investment officer at DBS North Asia.

“But if you had some tools within the market, in this case the Shenzhen-Hong Kong Stock Connect, then you can hedge the yuan asset inside — not outside the capital system.”

Despite the thin trade on the first day, Charles Li, chief executive officer of the Hong Kong Stock Exchanges & Clearing, remained optimistic. “If Shanghai connect was our baby step, Shenzhen connect is our second step: now we can walk and then we can begin to run,” said Li.

Hong Kong’s city leader Leung Chun-ying also hailed it as “yet another milestone in deepening mutual access” between the capital markets in Hong Kong and the mainland.

Neil Mclean of brokerage Instinet said the long-term significance of the stock connect should not be underestimated.

“The real huge significance of this over a 10-year scope is the ability for China to come in to the rest of the world,” said Mclean, head of execution trading for Asia ex-Japan. “China doesn’t open its doors for fun.”

Shenzhen is the world’s eighth-largest bourse with a market capitalization of US$3.3 trillion as of September.


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