House View: Stock linkup lessons

Bourse business

House View: Stock linkup lessons


With the literal strike of a gong the Hong Kong-Shanghai Stock Connect opened on Monday, marking the launch of a much-anticipated trading link that is aimed at allowing more cross-border investment in a number of companies in the mainland and Hong Kong. The linkup, limited to 500 mainland companies including those already dual-listed in Shanghai and Hong Kong for offshore investors and to 250 Hong Kong-listed shares for Chinese investors, marks a real step in the opening up of the mainland's financial system.

However, the smart money may have already moved on, and while the mechanisms of the Shanghai bourse are the same as those anywhere, the motivators for investors remain different from most other international markets: Momentum, policy and speculation tend to carry the day. While the 500 companies included in the Connect are fairly safe bets, cordoning off the remainder of the exchange gives the other companies little incentive to rectify the opaque bookkeeping practices that tend to make investors wary of China-listed firms.That leaves little opportunity for global investors to snap up undervalued stocks on the mainland, and the prospects of further big gains for the Shanghai market, which has risen more than 20% in the past year, seem weak.

Mainland investors saw the arbitrage opportunity almost as soon as Premier Li Keqiang announced plans for the program's launch six months ago, and by the summer's end had already positioned themselves to profit from them. Dual-listed companies' stock prices in Shanghai began rising toward parity thanks to the discrepancy between mainland shares' low valuations and their Hong Kong cousins' higher prices. On the first morning, the key indices in both markets were little changed. Bloomberg reported that in the first few hours, only about 7.7% of the daily quota for "southbound" mainland investors buying Hong Kong Shares had been filled, whereas over half of the quota for their "northbound" global counterparts had already been snapped up.

Still, Chinese investors may have another shot at easy money if plans for further opening proceed as hoped. In August, the deputy director-general of Shenzhen's Office of Financial Development Services told Reuters that the provincial government had raised the suggestion of a Shenzhen-Hong Kong bourse linkup with the China Securities Regulatory Commission. Even so, Shenzhen's ChiNext index fell 5% in the month prior to Shanghai's linkup as investors turned to the latter on expectations that foreign money would further boost that bourse's stocks.

That could provide quick-witted mainland investors with an opportunity to position themselves ahead of a Shenzhen through-train leaving the station.