The Hong Kong and Shenzhen exchanges are close to agreeing on the scope and features of how the Stock Connect scheme will extend beyond the current Hong Kong-Shanghai trading link. Industry players hope this could lead to Hong Kong connecting to Shenzhen by the end of 2015 or as early as May.
Wu Lijun, head of the Shenzhen Stock Exchange, last week confirmed that the principles, one of which is that the share-trading link’s basic framework and operations, will remain similar to the Shanghai-Hong Kong scheme.
The two other principles call for the expansion of stocks allowed for cross-border trading, as well as a requirement for the scheme to be implemented in an orderly manner.
A spokeswoman for Hong Kong Exchanges and Clearing (HKEx) says the two parties are discussing a detailed model guided by the principles. Once the proposal is ready, the bourses will seek approval from the China Securities Regulatory Commission and Hong Kong's Securities and Futures Commission.
Both stock exchanges have declined to confirm a timeline, although Charles Li, HKEx chief executive, has previously said he would be “disappointed” if the Shenzhen link were not live by the end of 2015.
Ivan Shi, an analyst at Shanghai-based consultancy Z-Ben Advisors, said the scheme may launch in the fourth quarter of this year. He reasoned that it will take time to be approved by regulators, not to mention likely needing another six months of preparation, as was the case for the Shanghai-Hong Kong link.
Others envisage a far shorter timeframe. Shenyin Wanguo, a Shanghai-based securities brokerage firm, suggests the link could start operating as soon as May, given the wealth of experience both sides have acquired in solving trading difficulties in the existing scheme.
The broker expects 309 of the 1,628 stocks listed in Shenzhen to be cross-listed in Hong Kong. This will include components of the SZSE 100, SZSE 300 and CSI300 indices, as well as names already listed in both Hong Kong and the mainland (dual A-/H-shares).
The main beneficiaries of the new trading link would probably be large-cap stocks, given their popularity with foreign investors tapping into Shanghai through the existing Stock Connect, said Mark Tinker, head of asset manager Axa Framlington.
And a greater proportion of private companies listed in Shenzhen would also benefit from the link, given that a much higher percentage of its companies are focused on China’s 'new economy', Tinker noted.
Information technology, healthcare and consumer sectors make up 51% of Shenzhen’s main index, as compared to 59% being in the more traditional sectors of finance, industrial and energy in Shanghai.
“There are high-quality technological, environmental protection and healthcare companies listed on the Shenzhen exchange, which could give investors access to more diversified stocks in concert with the Shanghai market's financial-sector focus,” said Kai Kong Chay, senior portfolio manager for Greater China equities at Manulife Asset Management.
But one area of concern for those looking to trade the Shenzhen market would be that the dominance of private listed enterprises could be adversely affected if any of their management teams were to face scrutiny over corruption allegations, he said.