China approves new mainland stock link to Hong Kong

Hong Kong is Chinese territory but its financial system is open to foreign investors while mainland markets are sealed off from global capital flows.

Moreover, Shenzhen equities are expensive, reflecting expectations of higher growth.

“CESC is created to make a contribution to the internationalisation of China’s capital markets and connectivity among the three exchanges”, CESC Chief Executive Mao Zhirong said.

By giving the green light to the final links of an ambitious plan to connect Hong Kong to China’s mainland markets – giving foreign investors more exposure to Chinese stocks – Beijing appears to strengthen its case for the inclusion of Chinese shares in global index providers such as MSCI.

But the $3.2 trillion Shenzhen market, already the worlds seventh largest, could prove attractive to foreign investors because it is where fast-growing Chinese companies that operate in sectors such as technology, pharmaceuticals and clean energy often list, according to the Wall Street Journal.

The Shenzhen-HK Stock Connect has been approved by China’s State Council and is expected to start trading in about four months once preparations are completed, an official statement said Tuesday.

The mainland’s benchmark stock index managed to hold above 3,100 points on Wednesday as experts grew optimistic about how the newly approved Shenzhen-Hong Kong Stock Connect program could push share prices higher.

But on a market capitalisation basis, they totalled half of the Hong Kong stock market operator. It allows investors from both cities to buy a limited range of stocks from the other side.

At the midday break, Hong Kong’s Hang Seng Index rose just 0.2%, with the Shanghai Composite declining by 0.2%.

A similar measure linking Hong Kong with the mainland’s main exchange in Shanghai was launched in 2014.

Foreign investors will be able to access almost 900 stocks on the Shenzhen exchange with a combined market value of over $1 trillion, according to the Journal. The Chinese premier said the move will help to reinforce Hong Kong’s status as a financial center, and it helped to boost sentiment there on Wednesday.

Tuesday’s decision “speaks to the fact that Chinese regulators are focusing on opening the capital market in general, whether it’s equity or debt markets”, John Malloy, who oversees US$2 billion as co-head of emerging and frontier markets at RWC Partners in Miami, said by phone.

The People’s Bank of China’s latest report showed that by the end of 2015, the RMB had become the third most-used currency in cross-border trade and financing.

Trade between the mainland and Hong Kong totaled 142.69 billion US dollars in the first six months, down 0.7 percent year on year. Another broader trading quota will be dropped for both trading links.