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The Shenzhen-Hong Kong Connect: A US$3 Trillion Opportunity
Aspire, Investments | 27 April 2015
By: Simeon Ang
Articles (125) Profile

Recently, the spotlight has been transfixed on the Shanghai and Hong Kong. What if there is an upcoming development that could be another opportunity for investors? But to take advantage of this opportunity, investors have to make preparations first!

The Shenzhen-Hong Kong Connect
As part of China’s move to open up its capital markets, Premier Li Keqiang recently announced that a trial programme connecting the Shenzhen Stock Exchange and the Hong Kong Stock Exchange will launch soon.

Market watchers like TS Phan (WeChat: 好汉)opine that the new connect programme will happen in July 2015. To him, the quota-based connect programme is a natural expansion of the Shanghai-Hong Kong Stock Connect which was launched in November 2014.

Source: FactSet Fundamentals; chart comparing the Hang Seng Index (Blue) and the Shanghai Composite (Green)

Then, China had set a cap of about Rmb 300 billion for total capital inflow (northbound) and outflow (southbound). The recent surge in trading activity of H-shares have managed to hit the the ceiling for southbound capital flows. However, that was not always the case. In the month of its launch, net capital flows only hit slightly more than a third of Beijing’s limit.

History could repeat itself again for the Shenzhen-Hong Kong Stock Connect, or not.

The Shenzhen Market

The Shenzhen market boasts a number of “new economy” companies in sectors such as technology pharmaceuticals and clean energy. With China’s push to be a more consumer-focused economy, attention on these sectors might be heightened. This is opposed to the heavy industrial and financial stocks of the Shanghai Stock Exchange.

The Shenzhen stock exchange currently has a market capitalisation of about US$3 trillion or about Rmb20 trillion.

What Can You Do About It?
As an avid investor and market watcher, TS Phan tells us that there are basically two things that retail investors can do.

1. Tapping Onto Northbound Capital Flows
Identical to the Shanghai-Hong Kong market, except with probably increased demand, northbound (Hong Kong to Shenzhen) should be higher this time around. How can you take advantage of this potential flow?

This will primarily require someone who you really trust. Open the account in this person’s name, and start trading shares listed on the Shenzhen stock market.

When the connect programme comes online, just wait for the hoard of global investors to flood into the market.

2. Tapping Onto Southbound Capital Flows
The recent surge in H-shares have been blamed on this. Basically, retail investors in China noticed the huge premium between A and H shares and decided to snap up hugely discounted H-shares.

This could potentially happen when the Shenzhen-Hong Kong connect programme comes online. Take for example, Chinese manufacturer Zoomlion.

Zoomlion is currently trading at about Rmb7.70 or about HK$9.60 in the Shenzhen market. However, its H-share equivalent (listed on the Hong Kong Stock Exchange) is trading at about HK$6, a discount of about 37 percent!

Imagine if you were a Chinese retail investor and looking to invest in Zoomlion. Would you buy in Shenzhen or in Hong Kong? Certainly, you would take advantage of the Hong Kong discount, right?

So to take advantage of such a potential capital flow, we can invest in H-Shares (that are dual-listed in Shenzhen) now.

#DYODD: As with all investment decisions, TS Phan wants to remind all readers that it is imperative readers do their own due diligence before investing in any assets.

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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