Stocks rally on signs of approaching Shenzhen-HK stock connect
A forthcoming stock connect that would link the mainland and Hong Kong markets, which is reportedly nearing its official launch, could offer fresh support to both markets, but its long-term impact might be limited, analysts noted Wednesday, saying further reforms are needed to ensure success.
The Shenzhen-Hong Kong Stock Connect, the second link between financial markets in the mainland and Hong Kong to further boost mutual market access, could be launched as early as next month, media reports suggested, citing recent signs from the Hong Kong Stock Exchange (HKEx).
Following the news, stocks in the mainland and Hong Kong bourses staged a rally on Wednesday. The Shenzhen Composite jumped 1.64 percent while the Shanghai Composite Index gained 0.94 percent. Over in Hong Kong, the Hang Seng Index edged up 0.61 percent.
Concept stocks linked to the stock connect, in particular, showed the strongest gains. The A shares of Zhejiang Shibao, a car power-steering gear manufacturer, reached their daily limit of 10 percent, while its H shares gained 7.9 percent.
The A shares of Shandong Molong Petroleum Machinery gained 6.09 percent, with its H shares rising 6.74 percent.
Launch speculations
The Wednesday gains come after news reports said that the official launch of the stock connect could come as early as July 1, which would coincide with the 19th anniversary of Hong Kong's return to China.
Media reports pointed to a recent move by the HKEx to start testing the stock connect's infrastructure setup. The stock exchange said in a statement on Tuesday that it has provided an end-to-end test package online for participants to test from June 27 onward.
However, the HKEx stated the test itself does not suggest an official launch, saying "no regulatory announcements or approvals have been made regarding the implementation."
At a new briefing on Friday, Deng Ge, spokesman of the China Securities and Regulatory Commission, also avoided naming a specific date, only saying data will be chosen this year for the launch.
Pitfalls
Analysts said while the launch of the stock connect will give "a shot of adrenaline" to A-share investors, its impact will not last.
"Feeding on topics and making speculative trading is the most predominant feature of the A-share market," said Xi Junyang, a professor at the Department of Finance of the Shanghai University of Finance and Economics.
"The launch of the stock connect will surely be a hot topic," Xi told the Global Times Wednesday.
But such an impact is limited in time and scale due to issues and obstacles in linking the markets as reflected in the ineffectiveness of the Shanghai-Hong Kong Stock Connect, according to Dong Dengxin, a professor at Wuhan University of Science and Technology.
"Despite the link between Shanghai and Hong Kong, the extent to which it is linked still remains low," Dong told the Global Times Wednesday, noting that the frequent discrepancies in the performance of the two markets are signs of ineffectiveness.
Dong attributed the ineffectiveness to discrepancies between investors in the mainland and Hong Kong. "Mainland investors like to trade small cap or newly issued shares. Hong Kong investors like to trade blue chips," he said.
The launch's scale is another obstacle to larger participation, Dong said. "The key aspect is whether the scale of investment targets will be expanded to include small caps in the Hong Kong markets."
Despite slow progress and its ineffectiveness, the stock connect is part of a larger reform plan for China's financial markets, which still remain small and need to be expanded, analysts said.
Dong said as China tries to bring its financial markets on the international stage, the launch of the Shenzhen-Hong Kong Stock Connect is "mandatory" and an effort to connect to outside markets.
"The opening-up of limited passages and linking with the more open Hong Kong market provides regulators an opportunity to see the pros and cons of enhanced connectivity with outside markets. This also serves as a prelude to further opening China's financial markets to world investors," Xi said.
In an apparent move to further open its financial markets, the People's Bank of China, the country's central bank, said on Tuesday that China will allow qualified foreign firms to issue stocks on the mainland, and would consider allowing foreign firms to issue Chinese depository receipts.
