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Tepid Response as Shanghai-Hong Kong Connect Could be met for China Opening Shenzhen Stock Market

Tepid Response as Shanghai-Hong Kong Connect Could be met for China Opening Shenzhen Stock Market
While it isn’t clear the new "through train" would see any more traffic than the lackluster Shanghai one, efforts by China to draw more foreign investors was evident when China announced plans to open its Shenzhen stock market for foreign investors.
China's Shenzhen stock exchange is home to many of the country's tech and consumer companies and under the so-called Stock Connect, investors in Hong Kong will be able to buy stocks listed on the Shenzhen stock exchange. In around four months' time, the arrangement was expected to be operational.
The existing Shanghai-Hong Kong Stock Connect, which was launched in late 2014, would be similar to the new Shenzhen ties. While only a daily quota was planned for Shenzhen, the Shanghai one was launched with a quota on both daily and yearly trade totals and this is the main difference between the two channels. Potentially paving the way for overseas investors to buy more Chinese stocks, an existing aggregate limit of 300 billion yuan ($45.25 billion) on the Shanghai bourse have also been scrapped by the regulators.
On the program's first day, analysts said that since Shanghai's "northbound" quota ceiling for funds headed to the mainland was only reached once and hence removing that restriction likely wouldn't matter much.
Investment via the Shanghai-Hong Kong connect was less than 1.0 percent of the total market capitalization of both exchanges after nearly two years in operation, capital Economics noted.
Analysts noted that since Shenzhen-listed stocks were considered expensive, often trading at 40-50 times earnings, opening up the stock market wouldn't necessarily change the fundamentals much. Goldman Sachs noted that Shanghai trades around 26 times earnings.
"China still hasn't understood the value of building trustworthy markets. That's not changed. The fact that you can access it doesn't solve that fundamental problem," Fraser Howie, an independent analyst and the author of several books on China's financial system, told CNBC's "Street Signs."
"The pickup [of the Shanghai-Hong Kong connect] has never been that strong because I think the regulatory environment in China is still a very dangerous one. A very uncertain one, and therefore people hold back," he said.
Reasons of foreign interest in Shenzhen's market might outstrip Shanghai were pointed put by some analysts.
There is difference in the types of stocks available, for example.
"Shenzhen companies are more concentrated in emerging industries including tech, media, and healthcare (a.k.a. New China) whereas the landscape in Shanghai is more oriented towards the 'Old China' sectors including Financials and Energy. This means that the Shenzhen-Connect opens up a brand new investable universe to global investors who have been able to monetize these fundamentally-exciting growth stories only in offshore markets like Hong Kong and the U.S.," Goldman Sachs said in a note.
Superior growth prospects were likely already priced into high valuations and the stocks were more speculative as the market was mostly owned by retail investors and hence the risks of investing in Shenzhen were higher, even then Goldman had cautioned.
Opening up Shenzhen may have more of a symbolic than a market impact, several analysts noted.
"It's quite symbolic that China is now ready to open up to the world," Steven Sun, head of China equity strategy at HSBC, told CNBC's "Squawk Box."
"This is obviously a confidence vote that China's out of the shadow of the market crash last summer and also the mini-crisis in the beginning of the year because of the currency volatility," he said.
"It is a sign that policymakers remain committed to financial reform and capital account liberalization," Julian Evans-Pritchard, a China economist at Capital Economics, said in a note.


Christopher J. Mitchell

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