Shenzhen-HK connect's false dawn frenzy

China's central bank governor implied that the long-touted trading link between Shenzhen and Hong Kong would kick off within weeks. Except he didn't. Investors still got excited.

Falsely raised hopes of a quick start to the long-touted trade link between the Shenzhen and Hong Kong bourses sent share prices soaring in China on Wednesday, exposing investors' pent-up buying interest after a difficult summer's trading.

In remarks later dismissed as out of date Zhou Xiaochuan, the head of the People’s Bank of China, was cited on the central bank website as saying that the Shenzhen-Hong Kong stock connect trading link would kick off this year.

“As we accelerate China’s opening up of trade and investments, we need to speed up the opening of the financial sector as well,” Zhou wrote in the online article. “This year we will launch the Shenzhen-Hong Kong Stock Connect, which shows China’s capital market has opened a new channel to connect the world.”

With less than two months to go before end of 2015, investors latched onto the comments to leave the Shanghai Composite Index up 4.3% on the day at its highest peak since late August. The technology-heavy Shenzhen Composite advanced 5.1%.

In Hong Kong, the Hang Seng Index rose 2.2% with mainland Chinese brokerages among the top gainers. The price of shares in Citic Securities and Haitong Securities rose 9.2% and 9.8%, respectively, in Hong Kong. 

However, Zhou's comments, although published on the PBoC website late Tuesday, were actually made at an internal meeting over five months ago, the central bank explained during afternoon Asian trading hours on Wednesday. That is, before A-share markets were hammered over the summer. Since then, there has been little talk of setting a time frame to launch the scheme.  

The central bank didn’t explain why the out-of-date speech was published on Tuesday. A call to its press office went answered.

Ready for launch

Hong Kong Exchange & Clearing said on Wednesday that the stock connect scheme is still subject to regulatory approval after the territory’s bourse operator noticed “unusual” movements in the stock market. “No agreement with our counterparts has been entered into,” it said.

Professor K C Chan, Hong Kong’s secretary for financial services and the treasury, also said that the preparations for the Shenzhen-Hong Kong connect had been completed.

“We’ve done our job for the preparations. Once we get the green light from the central government, we can start,” Chan said. “But we are still waiting.”

The link programme, if implemented, would illustrate the Chinese government’s determination to further reform and open-up the country’s financial sector by granting international investors greater access to the domestic market.

Last November, a similar programme, the Shanghai-Hong Kong Stock Connect scheme was launched to connect mainland markets and international investors through the proxy of Hong Kong.

“Either this year or next year, I don’t think it’s a big deal. [The Shenzhen-Hong Kong connect] is obviously the next initiative for [the authorities] to bring forward,” Keith Pogson, a senior partner covering Asia-Pacific financial services at Ernst & Young, told FinanceAsia.

Unlike the Shanghai stock exchange, home to most well-known state-owned blue chips, the smaller Shenzhen bourse has not yet been significantly mined by international investors.

Small- and medium-sized technology and biotech firms listed in Shenzhen could be more attractive to them, not least because their share prices could be easier to speculate on and drive up than in Shanghai, according to some fund managers.

"You need a bigger capital pool to speculate blue chip stocks. And many of them are listed in Hong Kong as well. [But] you can just invest in them directly here," said one Hong Kong-based fund manager at a large Chinese broker.

Pogson at Ernst & Young said international investors would however require “a lot more help” from analysts and insiders to invest in Shenzhen, home to Chinese technology giants such as Tencent and Huawei. “People who do know their market will be very excited to get into it….Others might wait and see.”

The erroneous talk of the Shenzhen-Hong Kong stock connect launch comes as Beijing steps up efforts to reform the country’s financial markets. The ruling Communist Party of China unveiled proposals on formulating the country’s 13th five-year plan on Tuesday, vowing to establish a “transparent and healthy” capital market and overhaul the trading mechanism of securities.

Meanwhile, on Monday HSBC said it would establish a majority-owned joint venture securities company along with the government-backed Shenzhen Qianhai Financial Holdings in Shenzhen.

The move would eventually allow the British bank to participate in a range of financial services on the onshore market, including stock broking, share sale underwriting, and wealth management, and demonstrated Beijing’s willingness to further open up the domestic securities industry.

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