Redefining Hong Kong

Shenzhen-Hong Kong stock tie-up could drive global fund surge

PUBLISHED : Friday, 22 May, 2015, 11:25pm
UPDATED : Tuesday, 22 September, 2015, 4:58pm

The anticipated launch of the Shenzhen-Hong Kong Stock Connect will spur the inclusion of A shares in the widely tracked MSCI index series and trigger billions of dollars of global fund flows into mainland equity markets, experts told the South China Morning Post's Redefining Hong Kong seminar yesterday.

"The hopefully forthcoming commencement of the Shenzhen-Hong Kong Stock Connect is a necessity for MSCI's inclusion of China. Shenzhen is going to be a critical component in the decision of MSCI's inclusion of China," Simon Sims, an executive director in charge of Asian equity swaps at Morgan Stanley, told delegates.

"If China gets included in the MSCI, it will bring more investment into China's market. You will have huge liquidity of passive money flowing into the mainland market," Sims said.

Investment funds that benchmark performance against indices like MSCI must typically buy stocks included in them.

MSCI's inclusion of A shares could see long-lasting capital inflows to the mainland, with an estimated US$17 billion of net buying per year based on an additional market capitalisation of US$110 billion, said a recent Goldman Sachs report. The probability of China's A shares being included in the MSCI index by next year was "close to 100 per cent", Goldman forecasted.

MSCI is expected to reveal in June whether A shares will be included in its global index series. A key requirement is that global funds can buy both Shenzhen and Shanghai stocks, because A shares are listed on both exchanges, Sims explained.

Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia said on Wednesday that the exchange operators in both cities were ready to launch. Approval from Beijing was all that remained to be secured.

The Shanghai-Hong Kong Stock Connect was launched last November. The combination of the Hong Kong and Shanghai bourses had already created the world's second-biggest stock exchange behind New York. Adding Shenzhen would consolidate that position, said Bruno Lee, chairman of the Hong Kong Investment Funds Association. The combined capitalisation of the three markets is US$13.9 trillion.

It would also give international investors direct access to the private sector companies that increasingly drive mainland economic performance, boosting funds available to firms that already create the bulk of new jobs in the country and aid economic rebalancing.

"The Chinese government wants a more balanced mix between state-owned enterprises [SOEs] and private enterprises," Lee said.

The Shenzhen bourse has far more IT companies and start-ups than Shanghai, which is dominated by large state-owned enterprises in the telecommunications, energy, industrial, property and financial sectors.

"The stock connect can bring mainland retail investors to an open international market - Hong Kong - and bring an international investment philosophy to the mainland," said panelist Patrick Law, an assurance partner at Ernst & Young.

Fellow panelist Witman Hung, the principal liaison officer for Hong Kong of the Shenzhen Qianhai Authority, said his background as a professional in the IT sector made one thing crystal clear: "More connectivity is always good."

Panel moderator, Ronald Arculli, a senior partner at law firm King & Wood Mallesons, said linking Hong Kong to Shenzhen's stock market would also boost job prospects for young people as part of the wider benefits of boosting market access.

That sentiment resonated with the audience. A straw poll at the seminar's conclusion saw 80 per cent of attendees back the view that Hong Kong would benefit from connecting to Shenzhen, up from 55 per cent as the session started.