China approves Shenzhen-Hong Kong Stock link

Stocks and Financial Services Press Releases Wednesday August 17, 2016 08:35
Shanghai--18 Aug--Asian Banker

Shanghai -- China is opening the doors to its tech-heavy Shenzhen exchange and scrapping important limits on how much foreigners can invest in the country's stocks, to entice more global players into its markets.

The moves are a milestone in the decadeslong opening up of China's financial markets and could mark a return to liberalization after a year in which regulators have tried to clamp down on the country's notoriously volatile stock trading.

They could help also attract foreign investors, who have avoided Chinese stocks amid a surge in emerging-market investment this year. They could persuade MSCI Inc. to finally add China to its emerging-market indexes, after snubs in the last three years, a step which could see billions of dollars pour into Chinese shares. MSCI declined to comment.

Chinese stock markets — and particularly the Shenzhen exchange — retain a reputation for casinolike behavior. Not all curbs are being lifted. Daily trading inflows into both Shenzhen and Shanghai, China's other main market, will remain capped at 13 billion yuan ($1.96 billion) a day, and many Shenzhen-listed companies will still be off limits.

Chinese regulators have shown a tendency to reverse course on market changes and crack down on free trading when stocks plunge. The moves to encourage money into Chinese stocks comes as authorities there have been grappling with heavy capital outflows.

"It's just another milestone in terms of reiterating Beijing's intents on opening China's markets to international investors," said Monique France, senior vice president at Mirae Asset Global Investments (USA) LLC. Mirae has invested in China through shares listed in Shanghai and Hong Kong and is likely to add some stocks from Shenzhen once the program begins, she said.

But the $3.2 trillion Shenzhen market, already the world's seventh largest, could prove attractive to foreign investors because it is where fast-growing Chinese companies that operate in sectors such as technology, pharmaceuticals and clean energy often list. By contrast, Shanghai, which foreign investors can already access via a trading link with Hong Kong, is dominated by less-vibrant state-owned banks and oil companies.

"Shenzhen is widely regarded as being a bit like the Nasdaq in its characteristics," said Mark Tinker, head of asset manager AXA Framlington Asia. "People looking to participate in the growth of China are looking more keenly to Shenzhen, and if this gives easier access to participate in that market, then it's going to be regarded as another positive step in the integration of China with the rest of the world."

The start date for the so-called Shenzhen-Hong Kong Connect is still unclear, although the statement announcing the launch said it should now come by the end of this year.
"Preparation work for the Shenzhen-Hong Kong Connect is basically done," China's State Council, the country's top policy-making body, said Tuesday.

The move will place some 880 Shenzhen-listed stocks, representing more than $1 trillion in market capitalization, onto the menu of global investors. The ChiNext, a listing board focused on fast-growing startups, will also be opened up, though limited to professional institutional investors.

Regulators also said there would no longer be an upper limit on the total amount of Chinese shares foreigners can hold. Currently, global investors can buy up to 300 billion yuan worth of shares in more than 500 Shanghai companies.

Still, foreign investors used to trading mostly on major Western markets will find plenty of oddities trading in Chinese stocks, including rules that prohibit day-trading of stocks, market holidays that fall on different days on each side of the border, and regulatory restrictions that make it virtually impossible to short stocks.

"I don't think it's crucial for people to be invested in Shenzhen at this point, but longer term there will be opportunities," said Ilya Feygin, managing director at brokerage WallachBeth Capital. "For me, Shenzhen is like the Nasdaq was in the 90s and 80s—it had a few bubbles but risk also represents opportunity."

When the Shanghai-Hong Kong Stock Exchange opened in late 2014, it led to predictions that billions of dollars would flow into shares of companies in China, where growth, while faltering, is still far higher than in most major economies.

But the launch was marred by regulatory and tax issues, and foreign interest was further chilled by the collapse in Shanghai stocks last summer that shook global markets. Beijing's attempts to stem the slide included introducing a circuit-breaker mechanism at the start of this year. The new system was scrapped after just four trading days when shares continued to slump. The head of China's market regulator resigned in February.

Such missteps have deepened skepticism about Beijing's desire to develop truly free markets. Recently, the existing Shanghai-Hong Kong trading link has been used more heavily by Chinese investors wanting to buy shares in Hong Kong.

"Last year's stock market rout and bungled policy response have hurt overseas demand for mainland stocks—foreigners have been net sellers of Chinese equities in recent months," Julian Evans-Pritchard, China economist at Capital Economics in London, said in a note.

The Shenzhen market opened in 1990, when the city was spearheading some of the country's most far-reaching economic overhauls.

Today, trading remains volatile, driven by retail investors and subject to heavy government intervention. Shenzhen lost 50.2% of its value from peak to trough from last June to September, compared with the 45.1% slump in Shanghai stocks during roughly the same period. Both markets are down about 12% year to date.

Investors have been anticipating the opening of the Shenzhen-Hong Kong Connect for nearly two years, since the earlier Shanghai-Hong Kong link started. Traders say the announcement has been delayed because Beijing's priority has been to stabilize domestic stock markets.

"Considering the number of fires they've had to put out this year, it makes sense for authorities to try to do this in a methodical way," said Bill Bowler, an equities trader at Hong Kong-based Forsyth Barr Asia Ltd.

Among the well-known companies listed in Shenzhen are telecoms equipment manufacturer ZTE Corp.; China Vanke, the country's biggest residential real-estate developer; and TCL Corp., a consumer electronics company that bought the Palm brand from Hewlett-Packard Co. in 2015.

However, few expect to see an immediate influx into Chinese markets. Many foreign investors have become skeptical of China due to the recent disappointing flow of economic data and lack of structural reforms the government had pledged. As of early August, China-focused stock funds have posted outflows of nine consecutive weeks, making it one of the worst performing emerging markets, according to EPFR Global.

This addition access to the Chinese market "is not going to have any impact on the fundamentals of Chinese companies, which continue to be quite poor," said Andrey Kutuzov, an associate portfolio manager at Wasatch Advisors, a Utah-based asset manager specialized in emerging markets. He said that earnings growth in China still lags behind markets such as India, Mexico and the Philippines.

But for some investors, the opening up of the Shenzhen market allows them to invest in the parts of a Chinese economy that are set to benefit from slower industrial and manufacturing growth. Nearly three quarters of Shenzhen-listed companies are in the "new economy" sectors, including service and technology, according to David Semple, who runs the $1.1-billion VanEck Emerging Markets fund. "There're a handful of stocks that we have identified that are interesting," he said. (Aug 17, 2016)--

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