Stock Connect

A tale of two cities: Shenzhen vs Shanghai

Shenzhen bourse offers investors access to young entrepreneurs and non-state companies

PUBLISHED : Tuesday, 16 August, 2016, 9:01pm
UPDATED : Tuesday, 16 August, 2016, 10:57pm

The Shanghai and Shenzhen bourses opened a few days apart from each other in 1990, but their growth over the past 26 years has traced different trajectories in China’s economic growth and transformation.

Shenzhen, located in China’s manufacturing hub and an hour’s journey by road to Hong Kong, was where technology companies, start-ups and young entrepreneurs sought to raise funds for their ventures, brokers and fund managers said.

“The Shanghai market lists more of the old-economy companies from traditional industries whereas Shenzhen features new-economy companies and stocks with growth potential,” said Hong Kong Investment Funds Association chief executive Sally Wong. “There may be more unique, niche companies in Shenzhen.”

Premier Li Keqiang on Tuesday gave the Chinese government’s go-ahead to proceed with the Shenzhen-Hong Kong Stock Connect, taking another major step in globalising the country’s financial system.

By trotting out the long-awaited programme, the government aims to put its best foot forward ahead of hosting a gathering of the Group of 20 nations in early September in eastern China’s Hangzhou city.

Shenzhen was a nondescript village in southern China until former paramount leader Deng Xiaoping picked it as the country’s experiment with market-style capitalism in the early 1980s.

In the decades since, the city and the Guangdong province that surrounds it has grown into a hub for finance, technology and innovation.

Among the Chinese companies that set up home there, Huawei Technologies is the world’s largest telecommunications equipment supplier. Midea Group, China’s largest appliance maker and recent owner of robotics maker Kuka, is two hours away by road.

The city did not have a stock exchange until 1990, when it opened a few days apart with a separate exchange in Shanghai.

Shanghai’s stock exchange was actually founded during the pre-teen years of a republican overthrow of China’s imperial Qing dynasty, beginning transactions in 1920. Trading was interrupted by Japan’s military invasion of Shanghai in 1941, and went through fits and starts when the Communist Party took control of China’s government, until transactions fully resumed in 1990.

Over nearly three decades, the Shanghai exchange ballooned to become Asia’s second-largest by transactions, hogged the limelight and soaked up most of China’s equities investments.

It is also Asia’s second-largest by value, with 1,098 A shares valued a combined 25 trillion yuan at an average price-earnings ratio of 14.4 times.

Shenzhen’s exchange is the fourth-largest, with 1,770 A shares with a combined market capitalisation of 21 trillion yuan at an average price-earnings ratio of 40.7 times.

Almost two years after the government unveiled the Shanghai-Hong Kong Stock Connect, the capital markets are still giving it the cold shoulder. As of August 16, overseas investors used up only 58 per cent of the quota allocated for Shanghai’s shares while 18 per cent of the southbound portion remained unused.

Shenzhen’s shares might receive a different reception, brokers and fund managers told the South China Morning Post.

“Investors are looking away from state-owned enterprises in favour of putting capital in small and medium enterprises that are lesser-known but offer potential reward,” said Capital Link International chief executive Brett McGonegal. “The Shenzhen SME board has more trading turnover than in Shanghai. That means investors are looking to the future and looking to the drivers of the new Chinese economy.”

Proximity to Hong Kong was a factor in Shenzhen’s favour, said VC Brokerage director Louis Tse Ming-kwong.

“It’s easier for Hong Kong-based analysts to visit Shenzhen-listed stocks in the city or Guangzhou so we can give more recommendations to investors,” he said. “These companies are familiar to analysts.”

It may also be a practical matter of availability as many of the biggest Shenzhen-traded stocks do not have a joint listing in Hong Kong.

Yuan-denominated stocks of companies in consumer services, capital goods, diversified financials, pharmaceuticals and technology were available only in Shenzhen, said Wong.

Eastspring Investments’ Asia equity portfolio specialist Ken Wong also said: “Names like Wuliangye, Midea and Gree may be of interest to global investors if these firms help them diversify their China portfolio. There are technology-related names in Shenzhen that investors won’t be able to buy in Shanghai or Hong Kong.”