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HKEx To Soar With SZHKSC Roll-Out
Aspire, Thought Leaders | 29 June 2015
By: Louis Wong
Articles (12) Profile

Following the roll out of the Shanghai-Hong Kong Stock connect (SHKSC), Hong Kong Exchange (HKEx) had started their preparations for an anticipated Shenzhen-Hong Kong Stock Connect (SZHKSC).

According to HKEx’s CEO Li Xiaojia, HKEx will be done with their preparations. They believe that the regulatory bodies will announce the official materialisation of the stock connect in the coming three to four months.

HKEx Ready For SZHKSC

After the announcement of the SHKSC, HKEx’s share price skyrocketed to HK$311.40 this year in May, rising more than 150 percent in a year from its HK$120 mark. Therefore, the Hong Kong market was very bullish about SHKSC.

After the Hong Kong market closed on 12 June, there were market rumours about the regulatory bodies possibly rolling out of the SZHKSC. As a result, the Hang Seng Index (HSI) surged by 373, a rise of 1.4 percent, despite no official news about it.

Another rumour was spread on 16 June, this time about a delay in the materialisation of SZHKSC till as late as 2016. The HSI fell by 295, a decrease of more than one percent, but it is apparent that the market is very sensitive about news surround the stock connect.

Despite the rumours of the SZHKSC delay, Li Xiaojia reiterated that HKEx’s plans for preparation measures are not changed and will be ready as mentioned before. According to the China Securities Regulatory Commission’s (CSRC) spokesperson Deng Ge, the development works of the SZHKSC are running smoothly so far.

He personally thinks that it will materialise, the only question is when. From the looks of the current situation, the possibility of it rolling out in October is still very high.

SZHKSC Key For China And HK’s Markets

Like the SHKSC, there will be a fixed amount of stocks available for trading via the SZHKSC. According to the general market sentiments, it is said that there will be about 500 to 700 stocks, including the small and mid-cap stocks in Shenzhen.

Among these stocks, there are also the “blue chips” among the small and mid-caps. These are the stocks that are said to have high potential and ‘guaranteed’ outperformance, which have a lot of room to expand. An estimated amount of 20 billion yuan worth of stocks are expected to be the base of the stock connect.

In HKEx’s perspective, the SHKSC was the first step to linking the markets of Shanghai and Hong Kong, the next step is SZHKSC. According to Li Xiaojia, SHKSC and SZHKSC are the “two legs” of the liberalisation of China’s capital market, while the trading channel for stock index futures would be the hips and waist.

The ability to trade stock index futures between China and Hong Kong’s markets will allow investors to better manage their risks. This is incidentally one of MSCI’s criteria for including A-shares in their Emerging Markets Index. Furthermore, it is also one of the requirements for the Hong Kong market to have pricing control over A-share derivatives.

HKEx Cheap Now

Aside from the stock connects between China and Hong Kong, the former’s commodity futures index is in a dire situation right now. This is because China is the world’s biggest importer of goods and has the highest consumption, yet it is unable to have a foothold in the pricing market.

Therefore, the commodity market can adopt the model of the SHKSC and create a trading market for both China and Hong Kong to buy and sell commodities. Li Xiaojia thinks that HKEx will be discussing with other parties about the feasibility of such an arrangement.

The fact that HKEx owns the world’s largest metal exchange, the London Metal Exchange (LME), gives it a very huge competitive advantage in pushing for a commodity connect.

As such, I am personally very optimistic about HKEx’s outlook. Furthermore, because of the news surrounding the uncertainty of the exact date of SZHKSC’s materialisation, HKEx’s share price took a slight correction. This might be a good opportunity for investors to enter. (I personally do not hold any shares of HKEx)

Louis is one of the most experienced fund managers in Hong Kong and has more than 25 years of solid experience in the financial markets. He employs a strict criteria for choosing his stocks, which is deeply insistent on having a thoughtful and sophisticated analysis of the company before making any investment decision.

Please click here for more information about this author.


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