China’s Premier Li Keqiang said the Cabinet had approved the launch of the Shenzhen-Hong Kong Stock Connect programme, putting in motion the final link of an ambitious plan to connect the gigantic stock markets of Hong Kong and the mainland.
The actual launch of the scheme is unlikely to trigger a rush of funds into China’s A-share markets, given the slowing economy and last year’s boom and bust, though onshore punters will cheer another option to diversify away from onshore stocks.
“Foreign investors are still taking a wait-and-see approach toward A-share investment as they are yet to regain confidence in the mainland stock market,” said Liao Qun, China chief economist at Citic Bank International in Hong Kong.
The Shenzhen Connect has been long-awaited, with the scheme first expected to go live more than a year ago. The plans were, however, delayed by China’s equity market crash last summer, which saw stocks slump around 40% and the government unleash a raft of measures to prop up the market.
Tuesday’s announcement comes in the wake of heightened global market volatility since the UK’s shock vote to leave the European Union in June.
Despite this, mainland investors have made a beeline for Hong Kong shares via the Shanghai-Hong Kong stock connect scheme, launched in November 2014, in a bid to buy non-yuan denominated assets amid fears over further weakening of the Chinese currency.
As of Tuesday, southbound quota usage stood at more than 80% while China-focused usage hovered around the 50% mark, raising concerns the quota to buy Hong Kong stocks may soon be exhausted.
“For many Chinese seeking to invest overseas, the current channels, including the Connect, are still too narrow, and there remain too many restrictions,” said Liu Haiying, chairman of Haiying (Shanghai) Investment Consulting Co.
Shenzhen and Shanghai stocks have both fallen around 12% since the start of the year, while an index measuring performance of Asian shares is up nearly 10%.
Despite the underperformance, stocks in Shenzhen are trading at higher multiples, with the broader market trading at a price-to-earnings ratio of 36 times versus Hong Kong, which has a P/E of less than 12.
“In the short term, I very much doubt this will drive significant flows into Shenzhen shares as a lot of stocks are expensive,” said Caroline Yu Maurer, head of Greater China equities at BNP Paribas Investment Partners.
In comments posted on a government website, Premier Li said that preparatory work for the Shenzhen-Hong Kong link had basically been completed, but he did not give details on the launch date.