Hong Kong welcomes launch of Shenzhen-Hong Kong Stock Connect

Hong Kong welcomes launch of Shenzhen-Hong Kong Stock Connect

Hong Kong's Hang Seng Index closed at a two-week high yesterday, partly aided by steady money inflows via the Shanghai-Hong Kong connect as the market sensed the approach of its sister link.

The stock exchanges and the clearing houses have also completed a series of market rehearsals with participants in both markets and reported that systems are ready and contingency plans are in place. That is roughly the same size as Hong Kong's.

The Four-party Agreement for the establishment of Shenzhen Connect was signed on 11 October 2016 by The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited, wholly-owned subsidiaries of HKEX, with the Shenzhen Stock Exchange and China Securities Depository and Clearing Corporation Limited.

The Shenzhen Connect scheme had been expected to go live more than a year ago, but was put on hold after last year's market crash, which saw stock prices fall by around 40 percent and a raft of interventionist measures unleashed to prop up markets.

The new scheme consists of a "northbound" channel, whereby investors in the Chinese territory and foreign countries can trade on the Shenzhen market via Hong Kong, and a "southbound" channel giving investors on the mainland access to the Hong Kong market.

The Shenzhen Composite Index has been volatile.

Regulators in August announced approval of the second connect and also removed aggregate quotas between the city and mainland equity markets.

Due to the link, mainlander fund flows are said to represent 10% of Hong Kong daily turnover while global investor traffic accounts for about 1% to 2% of Shanghai stock exchange trade.

Under the arrangement, any money made by foreigners trading on the Shenzhen exchange can not be invested further on the mainland, but will be returned to their Hong Kong accounts. The total quota of a combined 550 billion yuan (US$79.5 billion) for the Shanghai-Hong Kong link was removed in August, when Premier Li Keqiang said that the State Council had approved the new connect.

The link with Shanghai hasn't been as popular as authorities may have hoped, with investors rarely hitting the daily limits. This will both open up the startup-rich Shenzhen market to the world and let Chinese investors more easily add assets not denominated in yuan to their portfolios.

The announcement "comes at a time when the market could use a good vibe", said Tony Cheung, Liquidnet's head of quantitative analytics.

A similar link between the Shanghai and Hong Kong bourses was launched in November 2014.