Across The Border

Mainland Chinese investors and brokers not interested in Shenzhen-Hong Kong stock connect

Extension of cross-border trading scheme will just mean doubling of already underutilised southbound investment quota

PUBLISHED : Sunday, 14 February, 2016, 2:26pm
UPDATED : Thursday, 25 February, 2016, 5:07pm

As the launch of the Shenzhen-Hong Kong stock connect scheme draws nigh, with Hong Kong brokers believing it will be launched in the second half of this year, there are concerns the second iteration of the cross-border trading scheme could result in more one-way traffic.

Mainland investors and brokers have reacted nonchalantly to the eventual introduction of the scheme, which will allow Hong Kong and international investors to buy Shenzhen-listed A shares through Hong Kong brokers and let more mainland investors trade in Hong Kong-listed shares via mainland brokers.

“The majority of the southbound investment quota for mainland investors will probably be left idle for a long period of time,” Shenwan Hongyuan Securities analyst Qian Qimin said. “The new programme makes little difference to mainland investors.”

Since November 2014, when the Shanghai-Hong Kong stock connect scheme was launched, only about half of the 250 billion yuan southbound quota – the maximum amount of funds mainland investors are allowed to invest in Hong Kong stocks – has been used.

While there has been no official announcement, brokers expect the Shenzhen-Hong Kong scheme will have the same quota for southbound trading.

For mainland investors, the Shenzhen-Hong Kong stocks through train will represent no more than an increase in the already underutilised investment quota to 500 billion yuan, since they will be allowed to invest in the same Hong Kong stocks.

In the short term, the new scheme will be shunned by investors like me, but an additional quota of 250 billion yuan could be of use in future when we really learn how to play H shares
Bao Lihua, Shanghai investor

Hong Kong investors engaging in northbound trading are likely to be able to invest up to 300 billion yuan in stocks listed on the Shenzhen bourse’s SME board and ChiNext market, home to small and start-up firms that were excluded from the Shanghai-Hong Kong scheme.

Hong Kong investors should have reason to cheer when the scheme is extended to the Shenzhen market.

Between 2010 and 2014, companies traded on the SME board for small enterprises and the Nasdaq-like ChiNext market emerged as bright spots in the slumbering A-share market as institutional and individual investors shunned the big-cap stocks while hunting for small-cap, future-profit stars.

The mainland leadership’s positive stance on technology start-ups has whetted investors’ appetite for the small firms listed in Shenzhen.

Premier Li Keqiang proposed the Internet Plus strategy, encouraging companies to make better use of the internet and mobile technologies to improve efficiency in manufacturing and commercial processes.

Beijing is engineering a transition of the economy to a new growth pattern driven by consumer spending, rather than by investment and exports.

Shenzhen Stock Exchange chief executive Song Liping said last year that granting Hong Kong investors access to high-growth companies would be one advantage enjoyed by the Shenzhen bourse over its Shanghai counterpart.

But analysts predict southbound trading will turn out to be lacklustre.

Most mainland investors have accounts at both the Shanghai and Shenzhen exchanges and those who were keen on buying Hong Kong-listed stocks would have already invested in H shares, analysts said.

“We understand that the Shenzhen-Hong Kong stock connect scheme is a supplementary part of the reform,” said Bao Lihua, a Shanghai-based retail investor. “In the short term, the new scheme will be shunned by investors like me, but an additional quota of 250 billion yuan could be of use in future when we really learn how to play H shares.”

Millions of mainland investors got burned during a stock market rout last year and began to balk at equities listed domestically and overseas.

And most of the mainland’s retail investors won’t be qualified to trade in Hong Kong stocks through the connect schemes, with the minimum 500,000 yuan capital requirement for each investor in the Shanghai scheme likely to be copied by the Shenzhen version.

The typical mainland investor ignores the fundamentals of the companies they invest in and instead pays close attention to rumours related to the stocks before deciding to buy or sell shares.

Mainland-listed A shares are now trading at a nearly 40 per cent premium to their H-share counterparts and a few seasoned investors have already increased their H-share holdings.

“Few people here understand stock markets,” said Shanghai-based retail investor Emil Zhang, who owns H shares bought via the Shanghai-Hong Kong stock connect scheme. “It’s time to plant seeds in Hong Kong now and be patient to wait for a blossom in the future.”