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China quiet on Shenzhen-HK Connect

China's number three man visited Hong Kong and failed to mention the Shenzehen stock connect scheme, but Credit Suisse believes it is still launching this year.

Talk of the Shenzhen-Hong Kong Stock Connect, a long-discussed scheme that will give retail investors direct access to each other’s equity markets, had been expected ahead of this week’s Hong Kong visit by Zhang Dejiang, chairman of the National People’s Congress Standing Committee and overseer of Hong Kong affairs.

Zhang started the visit on Tuesday and left today, but did not mention anything about the scheme. 

Still, most analysts expect the scheme to be launched in 2016 and driven by southbound investment into Hong Kong-listed companies.

“We see the potential for the Shenzhen-Hong Kong Stock Connect to bring more interest on southbound Hong Kong small caps. While for northbound, the impact is limited and focused on size and quality,” Credit Suisse said in a research note today.

The firm’s strategist in April said a spike in volatility is expected when the Shenzhen-Hong Kong connect launches due to a huge valuation gap between the stocks in the two places.

The Shenzhen-Hong Kong link will expand the tradable stock pool for Hong Kong and Chinese investors, on top of the eligible stock list for the Shanghai-Hong Kong stock connect programme, it said.

For southbound, the current stock pool (Hong Kong-Shanghai) covers 315 Hong Kong-listed companies, which are mainly dual-listed stocks and large-mid cap Hong Kong-listed stocks.

But after the Shenzehn link is up, the bank expects some quality small-cap stocks will be added.

“We believe more retail investors will be attracted to invest in Hong Kong-listed stocks, if those small-cap stocks with better growth prospects are further [included] after the Shenzhen-Hong Kong Connect, given the higher risk appetite of retail investors.”

For northbound, the Shenzhen-Hong Kong connect will provide foreign investors with more access to diversified choices of China-related stocks only listed in Shenzhen, for example, in the technology sector, the bank said.

Overall, the bank believes that the impact should be limited for the near term, as the incremental interests on technology stocks would mainly fous on size and quality, the bank said.

“Considering the potential inclusion of A-shares on MSCI indices, we believe foreign investors, especially passive ones, will pay more attention to large cap names. On the other hand, for active investors, we believe it is still a matter of quality plus valuation.”



Since August 2015, the Shenzhen market has been the best-performing when comparing to the Shanghai and the Hong Kong markets, according to FE analytics. The equity markets have been volatility since August last year following the surprise RMB devaluation. 


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