China’s Shanghai-Hong Kong Stock Connect Fails to Deliver

01.14.15

China’s Shanghai-Hong Kong Stock Connect Fails to Deliver

01.14.15
China

By Margaux Schreurs for Global Risk Insights

Expectations were high for the Shanghai-Hong Kong Stock Connect as experts and investors hoped that the connection between two huge markets would give investors more access to mainland China’s stock market, and increase the flow between Shanghai and Hong Kong. However, end-of-year data show that the Stock Connect comprises two very different indices; the Hong Kong Hang Seng Index closed 1.3 percent higher compared to the start of the year, while the Shanghai Composite Index gained 52.9 percent.

Reports confirm that the Stock Connect had a slow first month with lower demand for mainland Chinese stocks than expected. Although buyers started strong at the beginning of the program, sales slowed towards the end of the first month. The vast majority of activity came from short-term speculative investors, as opposed to the anticipated pension funds and private banks. This meant that activity declined steadily as the first month of the Stock Connect went on.

The Shanghai-Hong Kong Stock Connect was launched on November 17 and allows for a maximum of 300 billion yuan, or $48.4 billion, to flow into China each month. However, after the first month, it became clear that only 66.9 billion yuan was spent on mainland shares, leaving the rest of the quota unused. From the 250 billion yuan quota set on mainland to Hong Kong transfers, only 8.4 billion yuan flowed into Hong Kong.

In hopes of increasing popularity and capital flow, Chinese state news agency Global Times reported that new measures will be put in place to boost the fate of the stock scheme in Hong Kong, including relaxing the threshold set on mainland investors.

At the moment, mainland investors need to have a portfolio of 500,000 yuan, or just over $80,000, to participate in the scheme. This regulation excludes a lot of investors and traders. Lowering this minimum portfolio would allow for more investors to participate, boosting the popularity of the scheme. It is still unknown when changes will be made to this regulation.

Hong Kong based brokerage CLSA conducted a poll of Chinese investors, concluding that 90% of investors were interested in investing in the Stock Connect, dropping to 20% once investors became aware of this 500,000 yuan limit. This is a shame as a lot of potential investment have been missed out on in both directions.

However, there may be other reasons why the Stock Connect has not been as successful as hoped. Investors have indicated that they prefer access to mainland Chinese markets through exchange traded funds, while others indicated that there were still operational issues for the Stock Connect to overcome. Still, time and trust will solve these issues, as the link between the two stock markets becomes more familiar.

If the Stock Connect is deemed to be popular enough, media reports that the Chinese government is also in talks and considering expansion to the Shenzhen Stock Exchange with a Shenzhen-Hong Kong Stock Connect. All of these programs are in line with China’s movement towards a freer economy, giving those outside the mainland an opportunity to access stocks in Shanghai.

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