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Shenzhen-HK stock link lets foreigners access China's booming tech firms
[HONG KONG] A long-awaited link between China's booming Shenzhen stock market and neighbouring Hong Kong goes live on Monday, allowing foreign investors first-time access to some of the fastest growing technology companies in the world's second biggest economy.
The link comes two years after regulators approved the Shanghai-Hong Kong stock connect scheme and extends China's efforts to open up its vast capital markets even as it struggles to enforce curbs on speculative money that was blamed for triggering last summer's stock market crash.
The Shenzen opening - hobbled by delays of almost a year - will finally connect all of China's stock markets, which with a combined market cap of over US$5 trillion serves up plenty of investment opportunities for foreigners and speculators.
Analysts expect a relatively subdued start for the link.
Pauline Dan, head of greater China equities at Pictet Asset Management Ltd in Hong Kong which manages US$168 billion in assets as of end-September 2016, said investors will need time to "gauge and assess the opportunities in the Shenzhen market."
"However, Shenzhen market has more smaller cap, technology companies which are not well covered and their disclosure level is lower than HK listed companies."
The pipeline will offer foreign investors 881 stocks in the Shenzhen's US$3 trillion stock exchange and 417 counters on the Hong Kong side to Shenzhen-based investors, according to Macquarie Research.
Aggregate quota limits were scrapped in August but there are daily limits of 13 billion yuan on the Shenzhen leg and 10.5 billion yuan on the Hong Kong leg, according to a stock exchange notification.
Shenzhen Stock Exchange and its boards - the main board, the SME index and the Chinext, which is the US equivalent of the Nasdaq have very distinctive features related to size, liquidity and private ownership which some investors are excited about.
The Shenzhen market has more small-cap stocks than China's other bourse, with an average market cap of about half of that of Shanghai listed shares but they are more liquid than some of their bigger counterparts in Hong Kong and Asia.
Almost 75 per cent of the most liquid names in an aggregated Asia ex-Japan plus Shenzhen universe are from the Shenzhen stock exchange, according to Francois Perrin, portfolio manager at East Capital.
The predominance of privately listed companies on the Shenzhen bourse - about three fourths of the companies listed here are privately held compared to a quarter to Shanghai - make them relatively more profitable. By sector, tech is the biggest and accounts for a fourth.
Still, some investors say from a valuation perspective, investment flows might initially favour Hong Kong as the Chinese currency remains weak after slipping to 8-1/2-year lows last week.
The Shenzhen stock market trades at a price to earnings multiple of 35 times while the Hang Seng small cap index trades at a third of that.
Daily flows under the existing Shanghai - Hong Kong stock connect scheme has diverged in recent weeks with the Hong Kong leg seeing a greater usage rather than the China-bound traffic.
"Yuan devaluation has encouraged outflows from the mainland and that could heighten volatility in Hong Kong," said Nicholas Yeo, head of China and Hong Kong equities at Aberdeen Asset Management which has US$405 billion of assets under management globally.