China to trial Shenzhen-HK Stock Connect in 2015

China will link its stock exchange in the southern Chinese city Shenzhen with Hong Kong "at an appropriate time" this year, according to the government work report delivered by Premier Li Keqiang Thursday.[Special coverage]

The official confirmation of the project came less than four months after China kicked off its landmark Shanghai-Hong Kong Stock Connect in November, allowing investors at the two bourses to trade stocks listed on the other in a bid to spur reform of China's stock market and realign it to international norms.

The expansion to Shenzhen will further expose foreign investors to a more diverse range of listed firms in China.

Thursday's government work report didn't disclose details regarding the upcoming stock connect program, but analysts predict the project will be similar to the Shanghai-Hong Kong Stock Connect.

Charles Li Xiaojia, chief executive officer of the Hong Kong Exchanges and Clearing, has previously said the Shanghai-Hong Kong Stock Connect has provided a successful and replicable model that could be used in the future for linking other markets and asset classes.

Under the Shanghai-Hong Kong Stock Connect, authorities granted an accumulative quota of 300 billion yuan for Hong Kong investors trading stocks listed in Shanghai, and 250 billion for trading in the other direction.

So far more than a third of the northbound quota has been used while use of the southbound quota only stands at 10 percent.

Unlike the Shanghai Stock Exchange, where shares of listed firms, mostly state-owned and from traditional sectors such as financial, industrials, energy and utilities account for 80 percent of market capitalization, firms listed in the Shenzhen bourse represent a budding private sector in technology, telecom, consumer discretionary and medical sectors.

"Companies allowed to be traded under the upcoming stock connect between Shenzhen and Hong Kong will offer offshore investors more diverse choice and further realign China's domestic exchanges with international market," analysts at Orient Securities wrote in a recent report.

The existing stock connect and the one in the pipeline has broadened overseas investors exposure to Chinese stocks. Prior to these programs, foreign investors could only invest in China's capital markets through the Qualified Foreign Institutional Investors (QFII) and a similar scheme called RQFII, which uses Chinese yuan raised overseas.

Chinese authorities have granted a combined quota of 252 billion U.S. dollars for the two schemes, of which 116.59 dollars have been approved as of February for foreign institutions to invest in capital markets on the Chinese mainland.

Analysts have generally touted the stock connect as a more flexible alternative to QFII and RQFII, though the latter two allow foreign investors to hold a broader range of securities. Authorities hope institutional funds brought through these channels can guide the domestic market for more value-oriented investment, rather than speculative trades.

With a market capitalization of 14.8 trillion yuan, the Shenzhen bourse boasts property developer China Vanke, Warren Buffett-backed hybrid car maker BYD, consumer electronic maker Midea, liquor maker Wuliangye, among other picks that domestic individual investors prefer to large-cap, state-owned names on the Shanghai bourse.

Average capitalization for Shenzhen-listed firms stands at 9.1 billion yuan, compared with 24.7 billion for Shanghai-listed firms, according to China International Capital Corporation (CICC).

Seventeen firms listed in Shenzhen also float their stocks in Hong Kong. Such dual-listed firms reached 69 in Shanghai. All but the shares of China Vanke currently trade at a premium to their shares in Hong Kong.

Listed firms in Shenzhen also enjoy faster growth in revenue and earnings compared with those in Shanghai but their stocks are also more expensive and traded more frequently by individual investors.

Hong Kong deputies to National People's Congress lauded the upcoming stock connect with Shenzhen as a reaffirmation of Hong Kong's strategic role of bridging China's capital market to the rest of the world.

"The new stock connect infuses confidence into Hong Kong's continued prosperity," said Lu Wenduan, board chairman of Hong Kong Winglee Group, who also serves as chairman of Chinese mainland's All-China Federation of Industry and Commerce.