In November 2014, the Shanghai-Hong Kong Stock Connect (the “Shanghai Train”), a pilot program for establishing mutual stock market access between mainland China1 and Hong Kong, was officially launched. The new cross-border investment channel establishes mutual stock market access between Hong Kong and mainland China, allowing Hong Kong and international investors to invest directly in designated securities listed on the Shanghai Stock Exchange (the “SSE”), and investors from mainland China to invest directly in designated securities listed on the Hong Kong Exchanges and Clearing Limited (the “HKEx”).2
Following the launch of the Shanghai Train, a second connect, the Shenzhen-Hong Kong Stock Connect (the “Shenzhen Train”) was introduced. Although initially expected to commence operations in the summer months of 2015, following the recent stock market turbulence, the Shenzhen Train is likely to be delayed3 and details regarding its launch have yet to be released. Despite volatile trading conditions, investors eager for a further boost of trading have been calling for a third connect, in the form of a China-Hong Kong commodities link.
Part 1 and Part 2 of this e-update series discuss key features of the Shanghai Train and the Shenzhen Train, respectively.Part 3 explains the unique nature and foreseeable advantages regarding the proposed commodities link. Part 4 will focus on analyzing the concerns and reasons behind the delay in launching the Shenzhen Train.
False Start vs Delayed Start
On November 4, 2015, Governor of the People’s Bank of China Zhou Xiaochuan was widely reported in the media to have remarked that the long-awaited Shenzhen Train would be launched before the end of the year. His comments gave an instant boost to investor confidence and stock trading, only to be dampened as it became known that the comments were made internally some six months ago.4
While no official statements have been made, sources close to the China Securities Regulatory Commission revealed that the stock market regulator is still working on details related to the Shenzhen Train, and there is no concrete timetable on the horizon.5
The false start may have been a miscommunication on the part of mainland China, but on the Hong Kong side, the SAR Government appears to favor a careful approach. In a wide-ranging interview6, Secretary for Financial Services and the Treasury Ceajer Chan Ka-Keung (“Secretary Chan”) explained that, as is the case of the Shanghai Train, investor protection and financial market stability are the overarching principles with regards to the mechanism of the Shenzhen Train.7 He indicated that details of the Shenzhen Train, still being ironed out at this stage, will reflect the government’s cautious stance on the matter, but declined to reveal further details.8
Quality and Stability
Launched nearly a year ago, the Shanghai Train, despite the initial enthusiasm it created in the market, has somehow fallen short of expectation. As of November 5, 2015, merely 43% of the southbound quota (RMB129.5 billion, equivalent to9 US$20.35 billion) and 36% of the northbound quota (RMB89.4 billion, equivalent to US$14.05 billion) were used up.
Chief Executive of the HKEx Charles Li believed that the Shanghai Train may require two to three years or more to realize its full potential10, and emphasized that security and stability are his principal concern at the early stages. This is a view shared by Secretary Chan, who reiterated that market stability and supervision are of paramount importance.
On the ground, however, some have been calling for measures to support and develop the through-train schemes, for example by allowing penny stocks and second-board stocks to be traded in Hong Kong, expanding the list of investment products and above all increasing the use of the Shanghai Train by mainland Chinese investors, and thereby increasing capital inflow and turnover.
Since the Shanghai Train involves mainly large-scale state-owned enterprises, so goes the argument, if the Shenzhen Train is to be delayed, there should at least be initiatives and measures to attract a wide base of investors so as to boost trading volume. On this point, the securities sector is well aware that penny stocks are particularly favored by mainland Chinese investors due to their high yield.11
Resisting calls to lower the threshold – currently at RMB500,000 – for mainland Chinese investors in purchasing Hong Kong stocks, Secretary Chan made it clear in unequivocal terms that the government had not set any target regarding the trade volume of the Shanghai Train, but instead had set quotas at intentionally high levels so as to prevent market disruptions. At this stage, however, he remained firmly against the inclusion of penny stocks due to risk concerns.12
On the Horizon
On November 6, 2015, the China Securities Regulatory Commission announced that the suspension of initial public offerings imposed as a result of the market crash will soon be lifted. At present, the Shanghai Train does not support initial public offerings. Due to the recent suspension, some 600 enterprises are currently being reviewed for initial public offering.13 According to market analysts, these stocks-in-waiting could raise up to RMB300 billion worth of new capital. An expansion of the Shanghai Train could help generate liquidity for these stocks-in-waiting when they debut on the A-shares market.
Despite market turbulence and popular appeals, the Hong Kong government refuses to compromise on investor protection and financial market stability, indeed two of the cornerstones of Hong Kong’s long term status as an international financial hub. As Financial Secretary John Tsang Chun-wah recently pointed out, at the technical level, the HKEx and the Shenzhen Stock Exchange are fully ready for the launch of the Shenzhen Train. A green light for the Shenzhen Train, however, has not been received from the Central Government, which is a policy-related decision.