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Stock Connect

Majority of small brokers in Hong Kong not interested in joining Shenzhen stock connect

High upgrade costs, limited demand from local investors seen as contributory factors for lukewarm response to proposed trading link

PUBLISHED : Monday, 05 September, 2016, 4:46pm
UPDATED : Monday, 05 September, 2016, 10:44pm

More than half of small brokers in Hong Kong are still reluctant to join the Shenzhen-Hong Kong stock connect due to high establishment costs and limited interest from local retail investors.

Hong Kong Exchanges and Clearing, the operator of the trading link, is yet announce the number of participants in the trading link, which by latest indications could debut as early as November.

Among the about 450 local brokerage houses in Hong Kong, only 135 brokers are on board with the cross-border trading plan that enables trading in Shanghai-listed A-shares, according to HKEX data. In addition, about 70 are signed up as brokers who trade through those 135 brokers with direct cross-border access.

Still the total accounts for just 205 brokers, or about 45 per cent of all the brokers trading for international investors in the Shanghai and Hong Kong stock connect even after the scheme was started in November 2014.

Benny Mau, chairman of Hong Kong Securities Association, expects the number of local brokers participating in the upcoming Shenzhen trading link to be the same as the Shanghai and Hong Kong stock connect.

Like many other local brokers, I do not think there is a need to join the Shenzhen and Hong Kong stock connect from day one
Joseph Tong, chairman, Morton Securities

“Brokers had to spend an additional HK$300,000 to HK$400,000 to install and update their trading facilities for the Shanghai-Hong Kong stock connect. They may incur the same charges for the Shenzhen trading link,” Mau said.

“If the brokers opt for not paying the sum to trade in the Shanghai and Hong Kong connect, I do not see any reason why they should participate in the Hong Kong and Shenzhen connect,” Mau said.

The stock connect scheme between Hong Kong and Shenzhen would allow international investors to trade 880 Shenzhen stocks via Hong Kong brokers while mainland investors can trade 417 Hong Kong stocks via mainland brokers.

This is the second cross border scheme after the launch of the Shanghai and Hong Kong stock connect under which international investors can trade 568 Shanghai listed A-shares while mainlanders can trade 266 Hong Kong stocks.

A tale of two cities: Shenzhen vs Shanghai

By Thursday the turnover of the so-called North bound trading of the stock connect, or international investors trading in Shanghai A-shares, stood at 2.28 billion yuan, representing 1.6 per cent of total Shanghai turnover of the day at 178.99 billion yuan.

Mainland investors trading via the Southbound route, or trading in Hong Kong stocks, stood at HK$6.5 billion on Thursday, representing about 9 per cent of the total Hong Kong market turnover of HK$71.73 billion.

Mau, who is managing director of China Securities International, a unit of mainland brokerage China Securities, said his firm is involved in the Shanghai and Hong Kong stock connect and acts as the trading agent for over 20 local brokers.

“I believe that after the Shenzhen and Hong Kong stock connect starts, there would be several small Hong Kong brokers who would want to appoint our firm as agents to trade the A-shares in Shanghai and Shenzhen. This is sort of a win-win situation as they do not need to invest in the system but they only need to share the commission with us. As for us, we would get more clients through the local brokers,” Mau said.

Best buys from the 880 Shenzhen stocks under the connect scheme

Joseph Tong, chairman of Morton Securities, said his company has no plan to invest in the Shanghai and Shenzhen cross-border trading platforms.

“Most of the local brokers focus on Hong Kong stocks. A majority of the small brokers in Hong Kong serve only local clients and hence there is no urgent need to join the stock connect scheme,” Tong said.

“Like many other local brokers, I do not think there is a need to join the Shenzhen and Hong Kong stock connect from day one. If the turnover of the stock connect would rise substantially in future and there would be a lot of client demand, my company or other local brokers may join it,” Tong said.

Tong said the active brokers in the stock connect scheme are mainly the major players who serve the fund managers or other institutional investors.

Mainland, Hong Kong stocks close lower after China approves Shenzhen link

Stephen Hui, chairman and chief executive of Luk Fook Securities, said his firm has traded A-shares for Hong Kong customers under the Shanghai and Hong Kong stock connect, but it has not gained too much of traction with investors.

“Only a few investors are interested in trading the Shanghai A-shares. However, we would still invest to provide the services of Shenzhen and Hong Kong stock connect as we believe Hong Kong retail investors would be more interested in the Shenzhen listed stocks than those in Shanghai,” Hui said.

According to Hui, Hong Kong is geographically closer to Shenzhen and many of the local brands there are familiar names with Hong Kong investors.

“The stock connect has not brought much business to our firm over the past two years. However, I believe in the long term, the stock connect between Hong Kong, Shenzhen and Shanghai or other mainland markets would be key features of the Hong Kong market. We are willing to invest for the long term,” Hui said.