Getting together

By Chen Tian in Hong Kong Source:Global Times Published: 2014-6-16 11:48:11

A man walks past the Shanghai Stock Exchange building in the Lujiazui Financial District in Pudong, Shanghai on March 11, 2014. Photo: IC


 
On April 10, the China Securities Regulatory Commission (CSRC) and the Securities and Futures Commission  of Hong Kong approved the Shanghai-Hong Kong Stock Connect program to allow mutual trading on the two cities' bourses.

Charles Li Xiaojia, CEO of Hong Kong Stock Exchanges and Clearing Ltd (HKEx), said on Tuesday in Beijing that the tie-up will "fundamentally change the A-share market" by introducing more institutional investors to Shanghai and encouraging mainland stock buyers to make more rational decisions.

Xiao Gang, chairman of the CSRC, said on April 11 that the program will boost the competitiveness of both bourses by bringing in more capital.

Also, it will increase the usage of offshore yuan and help Hong Kong consolidate its position as a world financial center, Xiao said.

However, while officials tout the bright prospects of Stock Connect, Hong Kong investors expressed concerns about the opaqueness of the A-share market and an absence of dividends paid by Shanghai-listed firms.

An unprecedented tie-up

All Hong Kong and overseas investors will be allowed to buy A shares on the program, HKEx said in an Information Book issued on April 29. However, only institutional buyers and mainland retail investors whose account balance exceeds 500,000 yuan ($80,314.83) can purchase Hong Kong-listed shares.

Only a portion of Shanghai and Hong Kong shares, such as those included in the SSE 380 Index and Hang Seng Composite LargeCap Index, will be allowed to be traded. Most of these shares are high-quality, blue-chip ones, including China's major commercial banks and State-owned companies.

"Shanghai-Hong Kong Stock Connect creates for the first time a feasible, controllable and expandable channel for mutual market access between the mainland and Hong Kong by a broad range of investors, paving the way for further opening-up of China's capital account and RMB (yuan) internationalization," the HKEx said in the Information Book.

Bryan Chan Ping-keung, a top executive of HKEx, was cited by Hong Kong Commercial Daily as saying at a legislative meeting on Monday that the bourse plans to run a trial of Stock Connect in September.

In the initial stage, B shares, Exchange Traded Funds and bonds, will not be allowed to be traded. But Li of HKEx said on May 22 that the scheme could be extended to fixed income and currency in the future.

Mixed reception

Although officials have been painting a rosy future of the scheme, some investors remain skeptical.

"I'm not interested in Stock Connect at all. My previous experiences of investing in the A-shares were painful," said a Hong Kong resident surnamed Dai, who has been a stock investor for more than a decade.

Dai spent 40,000 yuan in buying shares of Tianjin Guoheng Railway Holding in 2007, when China started developing the high-speed railway.

However, when officials who supported the construction of high-speed railways stepped down, related shares such as Guoheng tumbled, Dai told the Global Times on Tuesday.

"I sold my holdings and lost half of my initial investment," he said. "Many A shares are closely tied to the government's policies. The market is not transparent enough for me to make wise investments."

Another reason that is keeping Dai from A shares is that Shanghai-listed companies rarely distribute dividends.

"If I want to feel secure, I can buy some low-risk shares in Hong Kong and receive dividends every year. But that's not possible in Shanghai," he noted.

A Hong Kong-based Ernst & Young manager, who spoke with the Global Times on condition of anonymity, said none of his stock market investor friends or clients showed any interest in buying A shares through the scheme.

"Individual investors in Hong Kong are very cautious about the A-share market, which has been sluggish for years," he said. "Institutional buyers in Hong Kong might test the water, but retail buyers will not develop a strong interest in the short run."

But not all Hong Kong investors are skeptical.

Fung Kar-bun, a veteran financial industry professional and the chairman of Goodwill International (Holdings) Ltd, told the Global Times on June 3 that he will "definitely invest in A shares on Stock Connect."

"As China's economy has been slowing and a cash squeeze sweeps over the market, the A-share market seems to be underperforming," Fung said. "After China's economy stabilizes, Hong Kong and foreign investors will switch their money in the West to buy A shares, the prices of which are low and attractive. ... The program will be successful."

However, when investors will start pouring cash into the Shanghai bourse remains a question, he noted.

Mainland investors seem to be more interested in the program. Yao Changchun, a veteran HKEx shares investor in Shenzhen, told the Global Times on Monday that the tie-up will attract a large number of mainland investors to cash in on Hong Kong shares with high growth potential.

"Information disclosure of the Hong Kong market is more efficient, allowing investors to make more rational decisions," Yao said. "The price to earnings ratio of Hong Kong shares are much lower than mainland ones, the price of which fluctuate mostly based on ungrounded 'concepts.'"

Far-reaching effects

Yao, who invested 80 percent of his money in Hong Kong shares, said the scheme will benefit the Hong Kong market by offering mainland investors a chance to get familiar with local companies and shares.

"After investing in blue-chip shares that are allowed on the program for a while, many deep-pocketed mainland investors will consider buying riskier securities and financial derivatives in Hong Kong," he said.

Yao expects a large number of mainland investors to flock into the city or seek local brokerages to open accounts to buy a wider array of Hong Kong shares in the next few years.

HKEx recently lost several profitable IPO deals, including e-commerce juggernaut Alibaba Group and pork processing giant WH Group, making market watchers question if Hong Kong, once the most popular listing destination in the world, is losing its attractiveness.

Yao said the program might help HKEx to regain its popularity among mainland companies seeking IPOs, by allowing them to get familiarized with the Hong Kong market.

Dong Dengxin, a professor of finance at Wuhan University of Science and Technology, told the Global Times on Monday that Stock Connect could be a stepping stone for a program that links the Shanghai, Hong Kong and Shenzhen bourses.

"The three will converge in the end," Dong said. "The current program paves the way for a final integrated market, and is also a vital move for China to loosen control on its capital account."



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