I've been living on another planet, what is Shenzhen Connect?
The full name of this initiative is the Shenzhen-Hong Kong Stock Connect. As its name suggests, it is a programme that links together the stock markets of Shenzhen and Hong Kong allowing investors in each jurisdiction to trade and settle shares listed on the other side. A similar initiative – Shanghai-HK Stock Connect – has already been up and running since November 2014.
Is Shenzhen Connect any different from Shanghai Connect?
Yes and no. Shenzhen Connect is more or less built on the Shanghai Connect model, so most of the rules are the same. Both the north and southbound daily quotas are identical at Rmb13bn ($1.95bn)/Rmb10.5bn, respectively, while only investors who have an aggregate balance of not less than Rmb500k in their account can take part in the southbound route.
There are some differences in terms of the stocks available for trading, however, as southbound investors using Shenzhen Connect can invest in 102 more stocks than their Shanghai counterparts. That is because unlike Shanghai Connect, where southbound investors can only buy stocks in the Hang Seng Composite LargeCap, MidCap & A+H shares not included in the aforementioned indices, Shenzhen Connect also includes stocks in the Hang Seng Composite SmallCap Index. This expands the investable universe for Mainland investors in Hong Kong from 315 to 417.
Has there been any changes for Shanghai Connect as well?
Yes. The aggregate quota for both north and southbound trading has been abolished since August this year, putting it in-line with Shenzhen Connect.
What does the removal of aggregate quotas mean? Is Stock Connect now totally free of capital restrictions?
HKEX CEO Charles Li has said on multiple occasions that the total aggregate quota was introduced in the first place to prevent such a novel scheme from growing too quickly. But having seen Shanghai Connect operate smoothly since its inception, the time is ready for the quota to be removed. This, however, does not mean Stock Connect is now free of capital restrictions as the daily trading quotas of Rmb13bn (northbound) and Rmb10.5bn (southbound) remain for both Shanghai and Shenzhen Connect. The daily quotas exist to curb excess volatility and unforeseen large scale capital movements.
When will Shenzhen Connect launch?
December 5.
How many Shenzhen stocks will be made available to foreign investors?
For the northbound channel, 881 Shenzhen-listed stocks will be available for trading. These are the constituents of Shenzhen Exchange Component index and the Small/Mid Cap Innovation index with a market capitalisation of at least Rmb6bn, as well as all dual listed stocks in Shenzhen and Hong Kong. Stocks on the ChiNext board will only be available to institutional professional investors.
However, it is important to note that both northbound and southbound eligible stock lists are still for reference only and will be updated upon launch of the scheme. So things could still change.
So far so good, but what does this mean for China, markets and the world?
For China, this is more about further opening up its financial markets and integrating it with Hong Kong as well as the international community. Beijing has already taken steps to open up its interbank bond market this year by allowing unrestricted access to most types of foreign investors. With Shenzhen Connect due to launch, foreign investors will soon be able to put their money in almost the entire Chinese stock market as well either through the two connects or other investment schemes such as QFII and RQFII.
The opening up of China’s financial markets also lays the foundation for the eventual inclusion of A-shares into global stock indices such as the MSCI Emerging Markets Index and its government bonds into similar fixed income indices. This would be a game changer in terms of capital flows as such indices are heavily tracked by passively managed funds.
What’s next?
HKEX already laid out the plans for the next phase of the Connect programme, stating that regulators have approved the inclusion of exchange traded funds (ETF) in the Stock Connect scheme. The feature with roll-out in 2017 but a launch date will only be set following the launch of the Shenzhen link.
Is that the final form of mutual market access then? Or is there more to come?
As stated in the HKEX’s current strategic plan, more asset classes are set to be added. Two categories that could receive priority are currency futures and equity derivatives trading. Those tools would allow foreign and Chinese investors access to a broader range of hedging tools to protect their investments in the cash markets. While some equity futures, as well as options contracts, are available in the offshore market, China mostly limits shorting of stocks in the onshore market. A Stock Connect short selling facility introduced in March 2015 has seen no usage due to the restrictive nature of the trading rules