Shenzhen-HK Stock Connect begins, targets overseas investors

The long-awaited stock connection between Hong Kong and Shenzhen officially opened on Monday, with experts saying that the companies listed on the Shenzhen market will appeal to Hong Kong and overseas traders.

But southbound trading will be limited as Chinese mainland investors need time to get familiar with the Hong Kong stock market, experts added.

The launch of the Shenzhen-Hong Kong Stock Connect program was a "historic moment" for the integrated development of the Hong Kong and mainland stock markets, China Securities Regulatory Commission (CSRC) head Liu Shiyu said on Monday at the launch ceremony in Shenzhen.

Liu also said the link will inject "confidence and trust" into the financial markets at home and abroad, at a time when global financial markets are unstable.

The program follows the launch of the Shanghai-Hong Kong Stock Connect in November 2014 as a stock investment link between the mainland and Hong Kong.

Boosting northbound capital

Under the stock connect scheme, Hong Kong-based investors are able to trade all constituent stocks of the Shenzhen Component Index. Eligible Hong Kong stocks include the 318 Hong Kong stocks available under the Shanghai-Hong Kong Stock Connect, as well as 115 stocks in the Hang Seng Small-Cap Index that have relatively small market capitalizations.

E Zhihuan, chief economist of the Bank of China in Hong Kong, said that the new scheme would help Hong Kong-based and overseas investors better share the achievements of mainland economic growth, as well as provide a new channel to meet their investment needs.

"Many of the listed companies on the Shenzhen stock market are in emerging industries and are complementary to listed companies on the Hong Kong market. I believe the new stock connect link will be attractive to Hong Kong and overseas investors that think highly of the prospects of China's long-term economic development," E told the Global Times.

Prior to the launch of the program, the Shenzhen Stock Exchange held roadshows for the new stock link to potential investors in North America and Europe. The roadshows received a "warm response" from investors, according to a report from Hong Kong-based takungpao.com in November.

Gaps between markets

Xi Junyang, a professor at the Department of Finance of Shanghai University of Finance and Economics, said capital flow will remain light from the mainland to Hong Kong after the mechanism is launched, as many differences exist between mainland A-shares and the Hong Kong market.

"For example, speculating on stocks with certain 'themes' is a common practice on the A-share market, but this strategy would not be feasible on the Hong Kong stock market," Xi told the Global Times.

A Shanghai-based investor surnamed Dai told the Global Times that she wouldn't consider buying Hong Kong stocks as they are too "stagnant," without much room for speculative trading.

Another investor surnamed Chen told the Global Times on Sunday that he "has no confidence" in A-shares, and Hong Kong shares might be an option. Besides, he thought that a stock market with no trading limits (like Hong Kong's) is very "exciting."

Shao Yu, a senior analyst at Shanghai-based Orient Securities, told the Global Times on Sunday that Hong Kong stocks with relatively low valuations might be of some appeal to mainland investors, but it's very hard to quantify the scale of incremental capital that will flow to Hong Kong from mainland after the stock connect scheme.

The Shanghai Composite Index dipped 0.37 percent to 22,480.59 points on Monday. The Shenzhen Component Index slipped 1.18 percent to 10,784.33 points on Monday, while the Shanghai Component Index dropped 1.21 percent to 3,204.71 points.

Shao said the launch of the Shenzhen-Hong Kong Stock Connect could be seen as an early-stage experiment in the mainland's liberalization of its capital markets, though "it is unlikely to bring about too many changes in the short-term."

E said that Hong Kong, with its stable legal system and local regulations, will provide a "buffer zone" between mainland and Western markets, and will safeguard the mainland's opening up of its capital markets.