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Economic Watch: New stock link weighs on indices, but signals opening market

Xinhua, December 5, 2016 Adjust font size:

China's major stock indices tumbled unexpectedly on Monday, partly due to market jitters that the undervalued Hong Kong market may drag down mainland shares through a new stock link that started trading the same day.

However, the Shenzhen-Hong Kong stock connect signals a gradually internationalized domestic capital market that will create more investment opportunities and bring long-term benefits.

The benchmark Shanghai Composite Index shed 1.21 percent to close at 3,204.71 points, and the smaller Shenzhen index lost 1.18 percent to 10,784.33 points.

Turnover on the two bourses shrank to 511 billion yuan (74.2 billion U.S. dollars), mildly down from 555 billion yuan the previous trading day.

The declines were led by heavyweights, including brokerages and centrally administered state-owned enterprises, while small and growth companies were left unscathed. China's NASDAQ-style ChiNext Index even gained 0.02 percent to close at 2,143.88 points.

Analysts said the Shenzhen-Hong Kong Stock Connect to some extent should be held accountable for the bearish day, while citing several other negative factors, such as the hard-line stance of securities regulators against big-stake acquisitions using borrowed money.

"The stock link is not positive to indices as investors are likely to transfer funds from expensive mainland A-shares to the undervalued Hong Kong market," said Hong Hao, managing director and head of research at BOCOM International.

The average price-to-earning (PE) ratio, a main gauge used to value a listed company, stands at around 23 in the A share market, while that of Hong Kong is only 11. While a high PE ratio reminds buyers of risks, a low one indicates growth potential.

PE ratios for small- and medium-sized companies are predicted to fall, and some bubbles will be squeezed out in the mainland, said Xu Hongcai, an economist with the China Center for International Economic Exchanges.

By market close, a total of 2.71 billion yuan had flown into Hong Kong from the mainland via the stock link, while only 760 million yuan was transferred in the opposite direction.

As with a similar program between the Shanghai and Hong Kong bourses launched two years ago, the new link allows investors to buy and sell selected stocks on each other's bourses, but with easier accessibility and fewer restrictions.

Starting Monday, 417 Hong Kong-listed stocks became eligible for trade to mainland individual investors with securities assets and account balances worth more than 500,000 yuan. Meanwhile, 881 Shenzhen-listed stocks became available to Hong Kong investors.

To improve connectivity, securities regulators of the two sides canceled the aggregate quota for the new program, while putting the same caps on daily transactions as the Shanghai-HK mechanism, which amount to 13 billion yuan for northbound investment and 10.5 billion yuan for trading Hong Kong-listed shares.

Despite the market volatility, analysts said the stock trading link marks major progress in the internationalization of China's financial market in the long run.

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 stock link boosted cross-border portfolio investment. As of mid-November, the Shanghai-Hong Kong Stock Connect had posted cumulative turnover of 3.48 trillion yuan.

Xu said the two stock links will make China's capital market more open and healthier. "The entry of mainland capital will bring more vitality to the Hong Kong market, while Hong Kong investors will also share the dividends from economic transformation."

Zhu Yongqiang, an executive of First Seafront Fund, expects the mainland-Hong Kong link to cover more financial assets in the future, including bulk commodity futures and bonds.

"Shanghai, Shenzhen and Hong Kong are China's key capital markets. The integrated development of the three will boost the overall strength of China's capital market and even help the country become a global financial center," said Wang Jianjun, general manager of the Shenzhen Stock Exchange. Endi