Shanghai-HK stock link a boost for retail investors

Madam Ni Rongrong, 59, is a dissatisfied investor in Shanghai stocks.

While she has sunk a few million yuan in the Shanghai stock exchange, she is also irritated by its domination by uncompetitive state-owned enterprises - "where politics influences decision-making" - and the uncertainty surrounding many companies which lack thorough financial reporting.

Over the last three years, for example, she watched the share price of Jiangxi Hongdu Aviation, a military-jet maker, sink from 25 yuan to 16 yuan apiece, wiping almost a million yuan (S$201,000) off her portfolio.

She believes the decline is because state-owned companies with military links are not allowed to rise quickly in value by the authorities. "Shanghai is not a mature stock exchange," says the shipping executive. "But I have no other choice."

Come October, this will all change. With the establishment of the Shanghai-Hong Kong Stock Connect (SHSC), the doors to the global financial system will creak open to Chinese investors like her.

Announced last week by Premier Li Keqiang, the scheme - first proposed in 2007 - will allow two-way trade between the two bourses up to 23.5 billion yuan a day. That is equal to about 20 per cent of the combined average daily trading turnover of both markets.

Individual Chinese investors who want to dip their toes into the Hong Kong market must have a minimum of 500,000 yuan in their trading accounts, said a joint statement from the China Securities Regulatory Commission and the Hong Kong Securities and Futures Commission.

Previously, only big institutional investors could buy foreign shares through a Qualified Institutional Investor scheme that had onerous requirements.

This restriction, and the relatively undeveloped state of China's two bourses - Shanghai and Shenzhen - has meant that only 12 per cent of Chinese household wealth is currently in securities, said Hong Kong-based DBS analyst Nathan Chow.

The other Chinese exchange in Guangdong province's Shenzhen hosts smaller, younger and mainly privately owned companies, as opposed to Shanghai's state-owned giants.

The majority of Chinese households' savings is in deposits with negative real-term yields. In contrast, United States households have 44 per cent of their capital in securities, noted Mr Chow.

When the SHSC kicks off, this pent-up wealth in China will be allowed to flow offshore into Hang Seng offerings that include some of China's biggest companies like Internet giant Tencent.

International brands like Prada and Samsonite are also listed in Hong Kong.

Besides this Chinese wave of liquidity, international investors will likely flock to Hong Kong in bigger numbers once the stock connection is up and running, to gain access to the "A" shares of Chinese blue chips such as the Bank of China and Petrochina. "A" shares are those of China- based companies that are traded on the Chinese bourses and mainly available only to Chinese citizens.

But for other regional stock exchanges like Singapore, this breakthrough in the liberalisation of China's financial system may not be as welcome.

Singapore has long positioned itself as an alternative to Hong Kong, but with the latter's new status as a throughway to mainland stocks and capital, investors and companies looking to list will find the argument even less convincing, observers said.

"This move raises Hong Kong's status and solidifies it as ground zero for the internationalisation of the yuan over everyone else," noted Zhejiang University finance expert Li Jiming.

Still, analysts believe that if the SHSC succeeds, the Chinese government will seek more links with other stock exchanges - and Singapore will be in top contention.

"Once a test is deemed successful, China doesn't have any problem with expanding it," noted ING Bank's head of Asian economic research Tim Condon, pointing to its offshore yuan trading hubs as an example. Hong Kong was the first such hub in 2010, and Singapore became the second last year.

"This was not about allowing Chinese investors to invest in Hong Kong," he explained. "What's happening is a liberalisation of the capital account to let Chinese investors go into offshore markets. It's a scalable experiment, and if it's successful then it will be expanded both in terms of the cap level and also in destinations outside China."

In the long term, DBS' Mr Chow said, he expected a "Stock Connect" with the Taiwan, Singapore and London exchanges.

Ms Wang Liping, 32, a Singaporean who lives in Hong Kong, has been following the development of the SHSC closely. She has about HK$200,000 (S$32,200) in the Hong Kong bourse, and is now prepared to put in another HK$300,000 to HK$500,000 to take advantage of the exchange becoming a new portal to stocks on the Chinese mainland.

The finance industry executive has set her sights on companies listed on both the Chinese and Hong Kong exchanges, like automotive steering manufacturer Zhejiang Shibao, to exploit the price difference between the two types of shares.

As for building up a mainland portfolio, she plans to tread carefully: "I wonder a bit about regulatory governance and disclosure over there, so I would definitely do my research before proceeding on China stocks."

rchang@sph.com.sg

This article was published on April 18 in The Straits Times.

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