Quota expansion gets slow start

Experts expected lukewarm trading as long-term attractiveness yet to take effect

The first trading day of the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect's trading quota expansion got a lukewarm market response as financial analysts argued that bilateral capital inflows will depend on the long-term attractiveness of equity markets.

On Wednesday, the utilized quota of northbound trading of the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect amounted to 22.9 billion yuan ($3.6 billion), representing only 44 percent of the enlarged quota.

For the southbound trading of the two direct equity market links, the utilized quota was 12.15 billion yuan, only about 29 percent of the increased quota, the website of the Hong Kong Stock Exchange revealed.

Patrick Shum Hing-hung, investment manager at Tengard Fund Management, said: "The capital flows depends on whether equity investments are profitable. Therefore, just expanding the trading quota should not immediately uplift the local and mainland stock market."

People's Bank of China Governor Yi Gang announced at the Boao Forum in Hainan in April that the daily trading quota of the two equity market trading links with Hong Kong would be expanded by four times starting after the May Day holiday.

The northbound daily quota is being increased from 13 billion yuan for each of the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect to 52 billion yuan. In addition, the southbound daily quota is being increased from 10.5 billion yuan for each of the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect to 42 billion yuan.

The Shanghai and Shenzhen equity market trading links with Hong Kong were established in 2014 and 2016 respectively in a bid to cement further financial integration with the mainland.

Shum said the central bank's move is to prepare for the inclusion of A-share China companies in the MSCI Emerging Markets Index next month.

Starting in June, index provider Morgan Stanley Capital international (MSCI) will include about 236 large-cap A shares in its emerging markets index, a move that analysts said could bring large inflows of foreign funds to boost the value of those shares.

"Financial institutions will issue more A-share exchange-traded funds (ETFs) to attract overseas capital inflows into the country's stock market. Whether capital inflows into the A-share market can be sustained depends on the performance of these A-share ETFs based on the stock valuation level, and the market dynamics of the A-share market," Shum told China Daily.

Kenny Wen Kit, wealth management strategist at Everbright Sun Hung Kai, the Hong Kong securities trading arm of China Everbright Group, agreed with Shum.

"When the A-share market booms, mainland stock investors will also buy Hong Kong-listed shares. However, from the perspective of capital inflows and stock valuations, the performance of the A-share market will be lackluster in the near future, meaning stock exchanges across the border cannot instantly benefit from the recent boost of the trading quota," Wen told China Daily.