China's state council said to Approve Hong Kong-Shenzhen link

[SYDNEY] China's State Council has signed off on a stock-trading link between Shenzhen and Hong Kong, said a person familiar with the matter, as global money managers prepare for the next phase in opening up the US$7.3 trillion mainland market.

The programme, expected to mimic the Shanghai connect that began in November, will start this year, the person said, asking not to be named as the discussions are confidential. The link will provide more choice for investors who have an increasing appetite to trade in the world's second-largest stock market, said Emma Quinn, Hong Kong-based co-head of global equity trading at AllianceBernstein Holding LP, which has US$474 billion in assets.

"It's another avenue to access and this has to be a good thing," Ms Quinn said in an interview in Hong Kong on May 6. "Any way to open that up would be great. We have a lot of products wanting to trade in China."

Global investors have put 135 billion yuan (US$21.7 billion) into mainland equities through Hong Kong, amid a 68 percent surge in the Shanghai Composite Index since the first program began. A similar link with Shenzhen would offer more access to Chinese technology, consumer and health-care stocks, which make up almost half the city's benchmark index, while state-backed banks and industrial monoliths dominate the market in Shanghai.

Hong Kong Exchanges & Clearing Ltd is preparing for the Shenzhen connect to start in the second half of this year, and the start date may be announced by end of June, Chairman Chow Chung Kong said last month.

"Shenzhen offers more diversification than Shanghai," Arthur Kwong, the Hong Kong-based head of Asia Pacific equities at BNP Paribas Investment Partners, which oversees US$578 billion globally, said on April 29. "Shenzhen-Hong Kong stock link is a meaningful one for real fundamental investors, for the ones who really seek for good quality names."

Details on clearing and custodian services will need to be confirmed before her firm can invest in Shenzhen, said AllianceBernstein's Ms Quinn.

Elements of China's market structure, including a requirement to pre-deliver securities to a broker before selling them, have stopped some money managers from using the Shanghai link.

HKEx last month tweaked its systems in an effort to resolve the issue, allowing investors to open accounts with custodians that meet pre-trade checking requirements without revealing investment plans to brokerages.

Foreign investors rely on custodian banks to help ensure compliance with regulations and process trades after they take place. AllianceBernstein uses custodians and sub-custodians based in a number of jurisdictions, each of which will have to comply with new rules applicable under the link with Shenzhen.

"The biggest stumbling block is having multiple global custodians," said Ms Ms Quinn. "That makes it challenging." AllianceBernstein currently accesses Chinese markets through the qualified foreign institutional investor quota system and trades through the stock-connect programme between Shanghai and Hong Kong, Ms Quinn said.

BLOOMBERG