News Analysis: Shenzhen-HK connect big step for China's global ambitions

Betting on the future of China's stock market, Eddie Tam set up a Shenzhen branch of his Hong Kong-based hedge fund six years ago. Now he hopes a stock market link between Hong Kong and Shenzhen will bring him rewards.

The Shenzhen-HK Stock Connect has been approved by China's State Council and is expected to start trading in about four months once preparations are completed, an official statement said Tuesday.

Investors on the two sides will then be able to trade selected stocks on each other's exchanges. A similar link between the Shanghai and Hong Kong bourses was launched in November 2014.

Tam, chief executive officer of Central Asset Investments, said he is looking forward to the launch. His fund has already launched several yuan-denominated products that invest in A shares and Hong Kong-listed shares.

"Foreign capital will have easier access to China's domestic market, and Hong Kong investors can benefit even if they don't buy A shares as the capital inflow from the mainland will push up prices of Hong Kong's small and mid-cap stocks," he said.

Encouraged by the new program, the Shenzhen Component Index edged up 0.07 percent on Wednesday. Hong Kong's Hang Seng index closed down 0.48 percent despite opening higher in the morning.

Although the immediate influence on the A share market will be limited due to China's capital account control, the stock trading link marks major progress in the internationalization of China's financial market in the long run, analysts said.

Before the Shanghai-HK and Shenzhen-HK stock links were approved, cross-border investment in the equity market was only allowed under a series of projects with high thresholds and tough restrictions, such as QDII and QFII.

"The roll-out of the Shenzhen-HK Stock Connect after the Shanghai-Hong Kong stock link marks another concrete step for China's capital market in becoming more law-based, market-oriented and global," Chinese Premier Li Keqiang said.

Lin Caiyi, chief economist with Guotai Junan Securities, said trading links with Hong Kong will not be the whole story in the opening up of China's capital market. "Hong Kong is still too small for the opening Chinese market, which will ultimately be connected to the whole world," Lin said.

Securities regulators canceled the aggregate quota for the new program, but put the same caps on daily transaction volume as the Shanghai-HK mechanism, which amount to 13 billion yuan (1.96 billion U.S. dollars) for northbound investment and 10.5 billion yuan for trading Hong Kong-listed shares.

HSBC analyst Sun Yu said the removal of an aggregate quota will allow more overseas capital in and help prompt global equity indexes provider MSCI to include A shares in its emerging markets index as early as the end of this year.

MSCI announced its decision to delay the inclusion as it hopes for "further improvements in the accessibility of the China A-shares market" in June.

The new stock connect program will help the global expansion of the yuan, the Chinese currency, also known as the renminbi (RMB).

"The new program will facilitate cross-border renminbi flow and step up the currency in its efforts to go global," Hang Seng Bank's vice chairman and chief executive Rose Lee Wai-mun said.

Hong Kong serves as an international financial center and major offshore yuan hub, and the internationalization of the yuan as a global investment currency will reinforce the position.

China has vigorously promoted global use of the RMB as the world's largest trading nation looks to lower transaction costs in international trade, which currently is mostly settled in U.S. dollar.

Last year, the IMF decided to add the RMB to its Special Drawing Rights (SDR) currency basket, making it one of the five reserve currencies fully endorsed by the 188-member organization.

The People's Bank of China's latest report showed that by the end of 2015, the RMB had become the third most-used currency in cross-border trade and financing. It was in fifth place among all currencies for use in international payments and foreign exchange trading.

Tam expects more opportunities brought by the liberalization of the yuan's capital account in the future.

"Along with the yuan's accession to the SDR, we will in the next step focus on consumer business and service industry, especially financial services," he said. "We are optimistic about further increases in China's financial sector." Endi