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DAR Wong: HK-SH Connect To Bring About Demise Of S-Chips?
Aspire, Thought Leaders | 19 November 2014
By: Simeon Ang
Articles (125) Profile

On 17 November 2014 Monday, the Stock Exchanges of Hong Kong and Shanghai launched a trading link for mutual trading. This has been widely anticipated since April 2014 when Chinese Premier Li Keqiang announced that China plans to push ahead with its economic liberalisation. The Hong Kong – Shanghai Market Connect (HK-SH Connect) scheme allows China to implement a controlled channel in an attempt to liberalise its equity markets.

With the Market Connect now firmly in place, what shall we anticipate the future movement of China and Chinese stocks? Will this affect the Chinese companies listed offshore like H-stocks and S-Chips?

We approached investment expert, DAR Wong for his views about this new development and what investors can expect from the Chinese stock market in the near future.

1. How will the HK-SH Connect benefit the HKSE or the SSE? Do you expect to see wild moves in terms of market prices and volume once the Connect goes live?

The markets in these two territories will definitely see more volume and liquidity once the Market Connect begins. However, there could be many new rulings to be implemented by PBoC (Peoples’ Bank of China) in the beginning to ensure proper regulatory control and foreign capital influx. Therefore, in my opinion, we may see some liquidation in overpriced Shanghai blue chips and buying up of under priced H-shares in Hong Kong, thus resulting in trend convergence.

2. With the HK-SH Connect confirmed, what are the key challenges retail investors might face when investing in Shanghai stocks especially in terms of corporate governance issues?

Obviously, more foreign investors will be keen to invest in Shanghai stocks through Hong Kong. However, we must remain selective because the central government is also cleaning up many state enterprises and some might be penalised for business malpractices.

In addition, we are still uncertain if the Chinese authorities will implement new rulings if growth (price appreciation) becomes too rapid in the Shanghai equity markets.

3. How different will it be for investors if they decide to invest in S-Chips (China companies listed in Singapore) versus investing through the SH-HK Connect?

Currency settlement will definitely be different for Singapore S-Chips and Shanghai stocks. Other criteria that needs to be considered include the settlement period, collateral deposit for new trades, restriction in holding, etc.

We shall wait to see more details when the connecting scheme fully runs into the two markets.

4. With the HK-SH Connect, will the potential of further S-Chip IPOs dwindle? Do you think other bourses in the Asia Pacific will be rushing into partnership with Shanghai just like what Hong Kong did?

Broadly speaking, the success of HK-SH Connect might eventually discourage Chinese corporations from listing overseas. This may also give rise to the demutualisation of the two Exchanges to become the largest Stock Exchange in Asia.

In my other opinion, the Chinese government could plan its economic growth by popularising RMB currency into the future years through the establishment of “connecting” schemes to other Asia bourses. If this policy plan succeeds, RMB may become an essential reserve currency to be used for bilateral trading with Chinese suppliers and manufacturers throughout the regions.

5. What are the key things that retail investors should look out for when investing in Shanghai stocks? Are there any red flags that retail investors should be concerned about?

One of the most important keys for retail investors is to ensure easy capital flow through Hong Kong. Capital gains tax is free but still needs to be checked carefully in order not to commit legal offence, especially using the gains to invest in other areas.

*Editors Note: We note that China will temporarily exempt taxes on capital gains from trades made on Shanghai stocks through the HK-SH Connect.*

All in all, investors should check all details with a licensed stock broker for proper declarations of invested capital and profits before opening an account. 

6. Any further thoughts/opinions about the HK-SH Connect?

Currently, an RMB account pays about 6 percent annual interest rates. Blue chips usually pay more than 6 percent. As China begins to strengthen its economic foundations over the next few years, analyse the strong banking and financial stocks that are regulatory compliant. Other blue chips or steady corporations that run businesses to cater to inflation growth may lead the surge such as utilities, transport development, agriculture and mining, energies, real estates etc.

DAR Wong is an Approved Fund Manager with 25 years of trading experience in global derivatives and financial markets. DAR has been featured on Channel NewsAsia as a commodity expert and spoke on Singapore’s national radio, Capital 95.8FM. Currently, his advisory services on portfolio hedging and risk management training have covered 14 countries. His list of clients include numerous Exchanges, government agencies, brokers, and financial institutions.

Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

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