llustration: Peter C. Espina/GT
Global money managers look set to move onto step two for exploring opportunities in the Chinese mainland equity market, with Premier Li Keqiang stating at a regular executive meeting of the State Council on Tuesday that preparatory work for a stock link between Shenzhen and Hong Kong is basically ready and that a draft plan for implementation of the stock connection has been approved.
A few hours later on Tuesday, the China Securities Regulatory Commission (CSRC) and the Securities and Futures Commission (SFC) of Hong Kong issued a joint declaration about the stock link with additional details.
Indisputably, this is a step further in opening up the country's capital account as well as advancing internationalization of the yuan. The new trade linkup also instills hope in a solid stock market revival.
The approval of the long-awaited stock trading scheme, that will require about four months before it is up and running, according to the joint announcement, came quite a while after the launch of a similar link between bourses in Shanghai and Hong Kong in November 2014, when the mainland stock market began a bull run before crashing in the middle of the following year.
With mainland stocks having made a powerful rebound in recent days with the flagship Shanghai Composite Index above the key 3,000 point level, it is anticipated that Tuesday's announcement will fuel market risk appetite in the short term. It's unlikely that the new stock link will attract net capital inflows at high enough levels to turn the link into a decisive factor in steering the market.
The newborn system will follow the same daily trading limits its older brother has been subject to, with northbound daily trading capped at 13 billion yuan ($1.96 billion) and the southbound daily limit set at 10.5 billion yuan, CSRC and SFC said in the joint declaration. According to estimates by Guotai Junan Securities, if the new linkup covers 5-10 percent of the daily quota on average in the first six months after its official launch - the average daily amounts traded through the Shanghai-Hong Kong stock connection averaged approximately 9.8 percent of the limit during its first half year - roughly 75-150 billion yuan of capital will be added to the mainland market, which would only account for 0.9-1.8 percent of the total value of stocks in circulation in the Shenzhen Stock Exchange Component Index.
Also, if the new scheme follows in the Shanghai-Hong Kong footsteps, there is still a possibility that capital might flow out of the mainland market, given that the stock link's southbound quota usage has so far outnumbered the northbound quota usage.
However, Tuesday's announcement surpassed market expectations by not subjecting the new linkup to aggregate quotas and also by scrapping the total quotas previously set for trading on the first stock connection. This suggests authorities have become more confident about managing two-way capital flows through the stock link despite lingering uncertainties in the global market.
Furthermore, a wider range of stocks will be eligible for the new linkup, which will include stocks listed in both mainland and Hong Kong markets as well as a selection of Shenzhen Stock Exchange Component Index and Small/Mid Cap Innovation Index constituents. This is expected to lure in more global investors, as long as they believe in the worthiness of Shenzhen stocks. If all goes to plan, the new market linkup, along with the country's broad-ranging efforts to relax capital controls but toughen rules against unlawful disruptive trading activities, is set to give the mainland market a fresh tailwind.
