Shenzhen-HK Stock Connect to include ChiNext listings

Shenzhen Stock Exchange general manager Song Liping has announced that high-growth shares on the city's ChiNext board are likely to be included in the upcoming trading link with Hong Kong.
Shenzhen-HK Stock Connect to include ChiNext listings

The Shenzhen-Hong Kong Stock Connect scheme will likely include equities from the high-growth ChiNext board, it has been announced, amid indications that the trading link will be ready for launch in the first half of this year.

A senior official at the Shenzhen Stock Exchange (SZSE) yesterday said that the design of the expanded cross-border trading link had been completed, and regulatory approval was now the final step before launch. 

The announcement came days after Hong Kong's bourse unveiled radical future expansion plans for Stock Connect. But with the trading link ending its first week of short selling with no short trades made, blame has been placed on a restrictive framework. 

Speaking yesterday at the annual meeting of the National People's Congress in Beijing, SZSE general manager Song Liping announced that more equities than the market had been expecting were likely to feature in the new trading link. 

“Apart from the main board, [the Shenzhen-Hong Kong link] will consider including companies in the small and medium-sized enterprise board and the ChiNext market,” Song said.  

She added that the new Stock Connect's criteria for eligible equities will be large, actively-traded and ChiNext listed companies. 

Song said that even though Shenzhen-listed companies were relatively small in size, they were diversified across sectors, and the local bourse was preparing overseas roadshows for foreign investors before the trading link's launch. 

With the design completed, Song said approval from the China Securities Regulatory Commission (CSRC) and Hong Kong's Securities and Futures Commission (SFC) was all that was needed before launch of the new link. 

Song's comments come after Chinese media last Thursday reported Xiao Gang, chairman of the CSRC, as saying said both the CSRC and SFC would release details of the scheme's launch in the first half. 

Song said that more than Rmb160 billion ($25.5 billion) in total had been invested in SZSE equities via the qualified foreign institutional investor (QFII) scheme since QFII was launched in 2002. This represented a rise of 300% from Rmb53 billion at the end of 2011. One-third of these investments had been invested in stocks in the small and medium-sized enterprise board and the ChiNext market. 

ChiNext has been seen as the major market representing China’s 'new economy', with a preponderance of small companies in the technology, healthcare and media sectors. ChiNext has 421 listed companies, which had a market capitalisation of Rmb2.9 trillion with an average price/earnings ratio of 80 times as of last Friday. The ChiNext index increased in value by 83% and 13% in 2013 and 2014 respectively, and has gone up by 33% so far this year, as of last Friday. 

IT, healthcare and consumer sectors make up 51% of Shenzhen’s main index, compared to 59% of Shanghai's listings coming from the finance, energy and industrial sectors. 

While SZSE has not confirmed the launch date, Song said that given the experience gained in designing the  Shanghai-Hong Kong Stock Connect, the Shenzhen version has been faster to complete. 

Shenyin Wanguo, a Shanghai-based securities brokerage firm, has suggested that the new trading link could start operating as soon as May, as reported

Meanwhile, the Hong Kong bourse has said it is looking to step up its product range, beyond the current Stock Connect link with Shanghai, to create a critical mass for investors. 

Last Thursday Charles Li, chief executive of Hong Kong Exchanges and Clearing (HKEx), said the Shanghai and Shenzhen trading links were the beginning of a six-step journey to connect the mainland and Hong Kong markets. 

Li said discussions over the introduction of equity derivatives and commodities, in addition to stocks, could start by the second half of 2015. Next year, talks over trading international equities could also begin.

He said fixed income products and commodities could also be added to the mix, although he did not mention the timeline. 

However, the latest addition to Stock Connect, last week's introduction of short selling, has had a stalled beginning owing to technical difficulties. Last week saw no short selling trades, which industry players said was because of the difficulty in borrowing shares. Such an outcome was predicted last month when the short selling rules were announced.

A total of 414 Shanghai-listed A shares are eligible for short selling, out of 569 A shares available for conventional buying and selling through Stock Connect.  

Martin Corrall, chairman of the Pan-Asia Securities Lending and Borrowing, said the current rules do not work because the only qualified lenders are exchange participants. They are entities formed for the purpose of execution on the exchange, but they do not hold stock inventories. The rules exclude agent lenders, who are usually the providers of liquidity in other markets. 

The major agent lenders are Citibank, Bank of New York Mellon, JP Morgan, Northern Trust, State Street and BlackRock. 

“If they [agent lenders] are not able to lend, obviously there are not a lot of shares [for short sellers] to borrow from,” Li said last Thursday. 

Stock Connect short sellers also face restrictions over quantity, because short selling of a particular stock on a single day has been capped at 1% of the total number of shares held by all northbound investors at the start of a trading day. Over a 10-day period the cumulative limit is capped at 5%.


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