Hong Kong-Shenzhen trading link off to negative start

HONG KONG (UPDATED) – A long-delayed trading link between the exchanges of Hong Kong and Shenzhen in China got off a disappointing start Monday, December 5, with stocks on both sides of the border suffering sharp losses in the morning.

The link will open another door to the mainland’s cloistered stock markets, allowing foreigners to buy shares in more than 800 Chinese firms for the first time, while also giving mainlanders further access to Hong Kong-listed stocks.

Similar to a connect that kicked off between Hong Kong and Shanghai two years ago, the scheme is being touted as China’s latest effort to prove its capital markets are gradually opening.

But a growth slowdown in China’s economy, the weak yuan and an expected hike in US interest rates have analysts sounding a note of caution.

As gongs were struck in both exchanges to launch the link, Hong Kong’s city leader Leung Chun-ying hailed it as “yet another milestone in deepening mutual access” between the capital markets in Hong Kong and mainland China.

The former British colony is now a special administrative region of China but remains connected to the global financial system, unlike the mainland’s closed markets.

However, by the break Hong Kong was down 0.4% and Shenzhen’s composite index had given up 0.6%.

Hong Kong-based analyst Jackson Wong said the lackluster start was not a surprise.

“Investors were not expecting a spectacular open anyway, because investor sentiment is a little bit on the quiet side,” he said.

That was mainly due to the weak yuan and concern that China would not open up capital flows in the short-term, said Wong, a securities analyst at Huarong International.

However, the markets’ performance might improve once the currency stabilizes, he said, adding: “I think (China) will roll out more relaxed policies and that would eventually trigger… more buying interests.”

Analysts said the repercussions a rout last year in mainland markets – which spread globally – were still being felt.

That delayed the launch of the new link, which had been expected by the end of 2015. Concerns have been exacerbated more recently by capital flight caused by the weakening yuan, which is at 8-year lows against the dollar.

‘Huge significance’

Comments from Liu Shiyu, head of the China Securities Regulatory Commission, may also have dented sentiment, analysts said.

Liu blasted hostile corporate takeover attempts between Chinese firms in a strongly worded speech posted on the commission’s website.

In the highest-profile case, China’s largest property firm Vanke has been fighting to repel an acquisition by private conglomerate Baoneng Group that would be China’s first blue-chip hostile takeover.

While saying some buyouts can be positive, Liu condemned those in which the suitor becomes “a barbarian, and then eventually a bandit”.

He did not spell out any official measures to stem such takeovers.

“The (market) drop is mainly related to (Liu’s) speech rather than the stock trading link launch,” said Zhang Yufa, research director for private equity firm Million Tons Capital. “Market sentiment was affected by this.”

Shenzhen is China’s second stock exchange, behind Shanghai, and is the world’s 8th largest bourse with a market capitalization of $3.3 trillion as of September.

The Shanghai-Hong Kong link launched in November 2014 giving foreigners access for the first time to Chinese companies not quoted elsewhere, and vice versa.

But it has failed to excite traders, with both daily quotas for “southbound” mainland and “northbound” international buyers often unfilled.

Mainland trading accounts are valid for both the Shanghai and Shenzhen exchanges, so the latest link does not give access to the Hong Kong bourse to any extra investors. However, it will allow the existing ones to trade another 101 smaller Hong Kong-listed companies.

Analysts agree demand for mainland shares is sluggish owing to their unpredictability.

But southbound investors may see the stock connect as a timely opportunity to diversify, said Patrick Mohr, trading strategist at brokerage Instinet.

The brokerage’s Neil Mclean adds that the long-term significance of the stock connect should not be underestimated.

“The real huge significance of this over a 10-year scope is the ability for China to come in to the rest of the world,” said Mclean, head of execution trading for Asia ex-Japan.

“China doesn’t open its doors for fun.” – Rappler.com