Shenzhen-Hong Kong Stock Connect kicks off

A Chinese investor smiles at prices of shares (red for price rising) at a stock brokerage house in Haikou city, Hainan province, March 23, 2016.[Photo/IC]

HONG KONG - The Shenzhen-Hong Kong Stock Connect, the second link between the mainland and Hong Kong bourses, was launched on Monday.

Ceremonies were held simultaneously at Hong Kong and Shenzhen bourses via video link as Hong Kong Exchanges and Clearing (HKEX) Chairman Chow Chung-kong and Hong Kong Chief Executive Leung Chun-ying jointly beat a gong to mark the launch.

It is the second link of its kind to boost opening up of the mainland's capital market after a similar link between the Shanghai and Hong Kong bourses was launched in 2014.

"Following the footsteps of Shanghai-Hong Kong Stock Connect ... Shenzhen-Hong Kong Stock Connect is yet another milestone in deepening mutual access between the capital markets in China's mainland and Hong Kong," Leung said at the ceremony.

The new scheme is aimed at giving global investors access to stocks in the tech-heavy Shenzhen market via Hong Kong bourse. A total of 417 stocks on the Stock Exchange of Hong Kong are eligible for trading, and 881 stocks are eligible on the Shenzhen Stock Exchange.

Compared with Shanghai-Hong Kong Stock Connect, the new scheme between Shenzhen and Hong Kong represents "an enhanced version" in terms of its expanded scope of eligible securities, as well as the lift of limits on aggregate quota upon its launch, Leung said.

The Shenzhen-Hong Kong Stock Connect is exemplary of Hong Kong's combined advantages of "one country, two systems," he said. "We are, indeed, a 'super-connector' between the rest of China and the rest of the world."

Hong Kong stocks' benchmark Hang Seng Index opened 15 points, or 0.07 pct, higher on Monday morning.

HKEX Chief Executive Charles Li said he did not expect a sharp rise in turnover shortly after the launch. "It's like building a bridge. After the bridge is built, flows of people will arrive in succession in the coming 20 years or so."

He described the Shenzhen-Hong Kong Stock Connect as "the second leg" for the stock markets in the Chinese mainland and Hong Kong, "Now we can walk, and then we can run."

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The Shenzhen-Hong Kong Stock Connect, which launches today, will benefit mid- and large-cap growth stocks in the long term, particularly those from consumption-driven sectors, said analysts.

The SZ-HK stock connect will cover 881 Shenzhen stocks and 102 Hong Kong stocks. Starting today, 76 percent of the A-share market cap and 87 percent of Hong Kong market cap will be mutually accessible.

The connect will see more northbound interest in mid- and large-cap growth stocks, according to Gao Ting, analyst with UBS Securities.

"The existing programs that allow overseas investors to invest in mainland markets, QFII/RQFII and the northbound Shanghai-Hong Kong Connect, show that outside investors have a clear preference for lower valuation mid- and large-caps in financials and traditional consumer sectors, such as foods and beverages, home appliances and autos," said Gao in a latest research note.

Analysts said that overseas investors, many of whom are institutional investors, are focusing more on stable and steady yields instead of a short-term, speculative approach when trading A-shares, so they favor consumption-driven companies, particularly those playing a leading role in their respective field.

The Shenzhen market has a high concentration of technology stocks, 20 percent of its total market capital, offering a wide range of choices to investors with a strong interest in this fast-growing sector in China, said a research note from Haitong Securities.

Food and beverage players, such as Chinese white liquor (baijiu) makers, dairy goods makers, and snacks makers are also among investors' favorite options.

Over the past 10 days since the launch of the SZ-HK stock connect was announced, share prices of leading companies in the food and beverage sector have risen over 5 percent. For instance, Wuliangye Yibin Company Limited gained more than 5.8 percent, from some 34 yuan ($4.94) per share to more than 36 yuan per share.

Analysts said companies in sectors which are rarely seen in Hong Kong are also likely to win overseas investors' favor because they are supplementary to existing choices in Hong Kong's market.

These sectors include machinery, defense-related high-tech, pharmaceuticals, and policy-driven trade and infrastructure players, including those that have benefited from the Belt and Road Initiative and countrywide urbanization.

Liu Xiaoning, analyst with Shenwan Hongyuan Securities, said that Shenzhen-listed companies that have significant market share and have disclosed winning bids for infrastructure projects are likely to realize stable and steady income and profits in the long run.

Overseas investors, however, may not decide to participate in the market immediately with large investments as they did when the Shanghai-Hong Kong Stock Connect was launched, because the overall situation of the A-share market is significantly different now, said analysts.

"When the Shanghai-Hong Kong Stock Connect was launched, the A-share market was so heated that few investors foresaw the risks of downward pressure. Investors, domestic and overseas, were quite bullish about the market and somehow less rational than they should have been. Regulations, market conditions, and compliance were not kept to as high standards as they are now. In short, the A-share market is now with more rational and value investors. There won't be investors flocking toward the SZ-HK connect. More will patiently study, research, and make decisions," said a research note from Ping An Securities.