Hong Kong's and China's equity capital markets have been hogging the limelight since April. Primary deal flow has been on fire as investors rush to cash in on an index rally that has seen the Hang Seng advance some 11% and the Shanghai Stock Exchange Composite Index rise around 13% in the past month.
Share sales and fresh equity-raisings are hitting screens hard and fast, with some observers saying the trading levels represent a new normal for both markets.
The November 2014 launch of the Shanghai-Hong Kong Stock Connect — also known as the Through Train — set the foundation for the momentum, which gathered pace in April after the further relaxation of some capital controls by the Chinese regulators. Buyers responded with enthusiasm, with daily trading quotas on the Stock Connect heavily oversubscribed.
It’s certainly an exciting period for the two indices, and is something the world is paying attention to. Other markets are planning to follow suit.
Taiwan has been especially keen. It is working with Singapore on a platform connecting their two markets that is expected to kick off in July. And a link between Shanghai and Taiwan has been broached by many, as has a three-way connection between Hong Kong, Shanghai and Taiwan — something that would give investors full access to Greater China.
The talk illustrates that the region’s exchanges are eager to see some of the Through Train’s success rub off on them. But if other link-ups think they will be able to replicate the success of Shanghai and Hong Kong, they should think again.
There are plenty of obstacles to Taiwan enjoying the success of its neighbours. Trading volumes on the market are measly, with the Taipei exchange seeing daily average trading of only around NT$107.3bn ($3.5bn) last month. Numbers from Hong Kong and Shanghai are far superior.
This poor liquidity is an issue Taiwan has to contend with, especially since its investor base is dominated by retail accounts. In that it has something in common with Hong Kong, but the latter’s strength lies in the fact that it has been able to attract large Chinese listings.
Back to basics
The presence of these big Chinese companies has been one of the key drivers of the Shanghai-Hong Kong Stock Connect. A chunk of mainland corporates are dual listed, and when the Connect opened it gave Hong Kong investors a way to access onshore stocks — driving up valuations of A-shares in the process.
The staggering gap between A-shares and H-shares in turn drove the rally in the Hong Kong markets as southbound investors started looking for bargain buys. Taiwan, unfortunately, doesn’t have that additional appeal for investors. That’s even if the notion of connecting the three markets becomes a reality.
The market shouldn’t forget the basis for setting up the Through Train in the first place. It was to give investors access to China — a market that is otherwise largely shut to outsiders due to capital controls.
There is little holding back international investors from diving into Taiwan’s capital markets and it’s wrong to think the creation of a new link would give them any added impetus to do so.
China is rightly too big to ignore, and any country that attempts to join hands with the world’s second biggest economy will certainly not be considered foolish. It’s also positive that exchanges and regulators are already starting to think about the next alliances that can be forged between exchanges, even while the dust from the Hong Kong-Shanghai connect is yet to settle.
But it’s time to take a step back and realise that the factors that helped the Through Train are quite specific to the two markets involved, and tough to replicate elsewhere. The train has reached its destination but tickets for the next journey will be hard to come by.