Shenzhen-Hong Kong stock connect’s long-term benefits will outshine muted debut

By Song Shengxia Source:Global Times Published: 2016/12/5 23:38:39

The muted impact of Monday's Shenzhen-Hong Kong stock connect debut on the markets is no surprise amid uncertainties in overseas markets and expectations of further yuan depreciation. 

The launch of the trading link - which allows overseas investors to access fast-growing tech-heavy private firms in the Chinese mainland - signals confidence and courage from Chinese policymakers in handling changes in the domestic and international markets despite persisting pressure on capital flows and ongoing economic challenges at home and abroad. As such, the long-term impact of the link will outshine the initial response.

Monday saw northbound investment from Hong Kong into the mainland reach just under 3 billion yuan ($436 million), taking up only 21 percent of the allotted northbound daily quota under the new scheme. The link also failed to drive up the two markets, with the Shenzhen Component Index shedding 1.18 percent and Hong Kong's benchmark Hang Seng Index falling 0.26 percent.

Compared with the first day of the Shanghai-Hong Kong link in November 2014 when the northbound daily quota was used up within hours of its opening, Monday's performance isn't a good beginning. But the muted response is understandable as investors need time to adapt. The situation is also complicated by US President-elect Donald Trump's tweet criticizing China for manipulating its currency. The recent depreciation of the yuan may also have dampened international interest in the mainland's A-share market.

Some observers comparing the two links concluded that the new Shenzhen connect may not prove as worthy as expected. Such perception overlooks the fact that the A-share market has changed considerably since last year's stock crisis. The market is relatively stable and investment opportunities in the Shenzhen market are weighed toward the IT, environmental, consumer-related and healthcare sectors, which are at the center of China's economic transition into a consumer-based economy. These prospects will generate enthusiasm in the long run. 

Additionally, the operating rules of the Shenzhen link are upgraded from the Shanghai link and many potential loopholes have been removed. The new link offers a chance for the Shenzhen exchange to learn the mature institutional mechanism of the Hong Kong stock market and speed up integration of trading modes of the two bourses, laying groundwork for the integration of the Shanghai, Shenzhen and Hong Kong stock markets. 

Furthermore, a greater volume of funds are expected to flow southbound to Hong Kong for quite some time given the yuan's depreciation pressure.

If we consider the Shanghai connect a forerunner for China's drive to internationalize its A-share market, the Shenzhen link is an accelerator of that effort. The new link enhances the accessibility of the A shares and will increase the chance for the A-share market to be included into the MSCI Emerging Markets Index.    

Although it may take time for the new link to deliver concrete results, its policy implication is greater than its immediate outcome. It shows that China's resolve to open up its capital account remains unshaken and demonstrates confidence in coping with changes in international markets.     

The author is a reporter with the Global Times.


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