Shenzhen-HK Stock Connect: much-needed boost or damp squib?

Lingering doubts over a stagnant macro economy, increasingly dependent on a rising asset bubble, put a dampener on news of the new link’s official go-ahead

PUBLISHED : Wednesday, 24 August, 2016, 2:33pm
UPDATED : Wednesday, 24 August, 2016, 8:31pm

Some analysts are now warning that the launch of the stock trading link between Shenzhen and Hong Kong could have only a marginal impact on market volumes, with many investors still too concerned about a stagnant mainland macro economy, increasingly dependent on a rising asset bubble.

For weeks, many investors have been seen to be sitting on the fence when it comes to buying stocks, waiting to see what opportunities might present themselves from the much-anticipated Shenzhen–Hong Kong Stock Connect.

News last week of the official Beijing go-ahead for the scheme has offered a steadying effect to stock market sentiment. The Shenzhen Component Index has fallen 0.94 per cent since the announcement on August 16, while the Hong Kong benchmark Hang Seng Index has remained almost unmoved, shedding just 0.27 per cent.

The early enthusiasm is now proving short-lived, however, with some commentators saying many investors have become indifferent towards the scheme’s eventual impact.

The new Shenzhen system will be similar to the existing Shanghai-Hong Kong Stock Connect, which was launched in late 2014.

Wary that the pickup of the Shanghai-Hong Kong scheme has never been that strong, the main difference between the two is that Shanghai was launched with a quota on both daily and yearly trade totals, while only a daily quota is planned for Shenzhen.

Regulators have also scrapped an existing aggregate limit of 300 billion yuan on the Shanghai bourse, potentially paving the way for overseas investors to buy more Chinese stocks.

Analysts with Bank of America Merrill Lynch, led by David Cui, say they expect the new link to start as planned in mid December.

However, they also predict capital flows to be even weaker than under the Shanghai connect, “given the latter covers more stocks that are of interest to global investors, while the Shenzhen connect doesn’t expand the investable universe in HK for mainland investors that much”.

Adam Xu, a mutual fund manager with the Shanghai based Guotai Fund Management Co, added that information on the program was so badly leaked, “that a handful of investors had even made their moves” before Premier Li Keqiang officially announced the kick off, “and have cashed in over the past few days”.

Hong Kong Economic Journal, quoting one source with a mainland-based fund company, had already trailed the approval story three days earlier.

There was a bounce in share prices at the start of the week the announcement was made, but after reading for weeks to expect a significant boost when an official go-ahead was given, sentiment has gradually lost momentum.

Following the premier’s statement, Hong Kong Exchanges and Clearing said the programme would allow international investors to trade 880 Shenzhen listed stocks and mainlanders to trade 417 Hong Kong stocks, adding more options of mid and small chips to those already available under the Shanghai–Hong Kong scheme, mostly blue chips.

“The scheme seems just another non-essential for Chinese investors,” said Xu.

“Everyone will still be keen to move their money out if investment returns inside China keep falling. Opening up another channel for direct purchase of equities in Hong Kong has done little to quench their thirst.”

China’s benchmark ten-year government bond yields fell to a low of 2.7 per cent last Friday, their lowest since 2009, while the price of homes in China’s major cities continues surging well ahead of any other major market.

Value Line, a mainland-based trade magazine, even found recently that aggregate prices of sellable home space in Shanghai and Beijing are now roughly five times of that in New York, which stood at US$1 trillion in January, suggesting huge asset bubbles continue to form.

More worrying still, is the nation’s growth outlook.

Private investment, which accounts for 60 per cent of the country’s total and is considered the best barometer of consumer confidence, grew just 2.1 per cent in the first seven months of 2016, the lowest level in the recent 16 years.

“Chinese companies are shrinking their balance sheets as their expectations for economic growth become less optimistic that before,” said Liu Shengjun, deputy director of the CEIBS Lujiazui Institute of International Finance in Shanghai.

“More companies are using income to pay back debt, rather than expand their businesses, and if that continues there will be an acceleration in economic contraction.”

Only cutting taxes will have a genuinely positive impact on the real economy
Liu Shengjun, deputy director of the CEIBS Lujiazui Institute of International Finance

Liu considers it a “dangerous sign” that most new loans are still being ploughed into property investment, adding that further easing in monetary policies will simply add more air to the asset bubble.

“Only cutting taxes will have a genuinely positive impact on the real economy,” he said.

But despite the ongoing shadows hanging over the mainland economy, there will of course be some still brave enough to embrace the new wave of investment options to come from the Shenzhen-HK link.

Data from the Securities and Futures Commission shows the number of mutual funds, for instance, rose 12.7 per cent to 684 in the first half, as fund houses created more investment products in Hong Kong to capture the expected rise in capital created by both new cross-border schemes.

Rene Buehlmann, head of Asia Pacific and group managing director at UBS Asset Management, said he was excited about the new connect, and remained upbeat about China’s commitment to open up its markers.

“But the one thing I would like to remind everyone, is if you go to China with a passive strategy, you’ll get killed. Shenzhen offers good options, with carefully selection stocks,” he added.

It should also be noted, that a number of companies listed on the ChiNext board in Shenzhen – which will be partly open to international investors under the Shenzhen scheme – have been trading at three- of four-times their multiplies in recent months, a strong indication that some companies are already benefiting from the imminent launch.