Twice as good: Shenzhen-Hong Kong link offers overseas investors access to tech firms

The Shenzhen-Hong Kong Stock Connect, expected to begin trading in late November, signifies a major step taken by mainland China in the liberalisation of its capital market.

Specialists at leading accounting firms say the scheme complements the Shanghai-Hong Kong Stock Connect.

The launch of Shenzhen-Hong Kong Stock Connect is expected to be an exciting opportunity for overseas and mainland investors.

Eddie Wong, partner of capital markets services at PwC Hong Kong, says the companies listed on the Shanghai Stock Exchange tend to be large financial institutions and state-owned enterprises, while Shenzhen Stock Exchange is a hub for technology companies.

“As many of these technology companies are not listed in Hong Kong and are otherwise inaccessible to overseas investors, there will be a wider range of stocks available to overseas investors. The additional trade volume and liquidity should help drive up the value of the stocks and help restore value and investor confidence to China’s capital markets.”

After abolishing the aggregate quota system, the stock connect schemes have become more open, sending a message to investors that China’s capital markets will be governed by the laws of supply and demand, which will encourage overseas investors more familiar with free-market stock exchanges, he says.

Wong says: “The addition of a new stock connect scheme also means the daily quota has effectively doubled, meaning mainland investors have more flexibility to invest in the Hong Kong market and gain access to many mature and sizable companies with stable dividend yields.”

Echoing Wong’s view is Ringo Choi, EY’s Asia-Pacific initial public offering leader. “As the overall quota limits for the Shanghai-Hong Kong Stock Connect have been lifted since July 17, this will be an indication to investors that the authorities are determined to open up the A-share market to international investors in the long term,” Choi says. “One of the purposes of the daily volume limits is to prevent unusual fluctuations in demand for the yuan through the stock-connect scheme. The market seems to have got used to the temporary suspension of trading as the cooling off period, as long as the market trading can be resumed the following day.”

The Shenzhen-Hong Kong Stock Connect will likely bring new energy to Hong Kong as 100 small-cap stocks listed in Hong Kong are now eligible and provide mainland investors with more choices.

Choi adds: “The approval of the Shenzhen-Hong Kong Stock Connect may boost market sentiment. It is a welcome sign showing that policymakers in Beijing are keen to press on with financial reform as concerns over market volatility and capital outflows are fading.

“The Shenzhen-Hong Kong Stock Connect would encourage more foreign institutional investors to invest in the Hong Kong stock market. Companies from around the world can raise mainland funds through Hong Kong, while mainland firms can also raise foreign funds through the city.”

The Shenzhen-Hong Kong and Shanghai-Hong Kong Stock Connects are “sister” programmes with essentially the same trading and clearing flows. From a taxation point of view, there is a general expectation in the market that the Shenzhen-Hong Kong Stock Connect will be able to inherit the preferential tax treatment available under the Shanghai-Hong Kong Stock Connect, says Dr Danny Po, Asia-Pacific mergers and acquisitions tax leader at Deloitte China.

“For instance, there are exemptions from the 10 per cent mainland China’s withholding tax on capital gains for Hong Kong investors under northbound trade flow and the temporary exemption from China’s individual income tax for trading gains derived by mainland investors under southbound trade flow.”

Louis Lau, partner of capital markets advisory group at KPMG China, says unlike the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong scheme has been anticipated.

“The Shenzhen Hong Kong Stock scheme will increase investment options in terms of technology and start-up companies.

The scheme is not expected to attract a strong market reaction at launch but will continue to draw attention from investors over time.”

The level of trading activities under the Shanghai-Hong Kong Stock Connect is not hindered by the existence of total quotas, evidenced by the availability of quotas balance 21 months after its implementation, Lau notes. “The abolishment of total quotas is unlikely to boost trading activities immediately, but it will facilitate trading links between the two regions in the longer run. The stock connect schemes will enhance the integration of the two regions’ capital markets and will add to the attraction of Hong Kong as an investment hub.”