Multi-billion dollar Hong Kong-Shanghai link-up launches

[HONG KONG] The stock exchanges of Hong Kong and Shanghai on Monday launch a much-anticipated trading link that will see billions of dollars in daily cross-border transactions and partially open up China's closeted equities markets to the world.

After weeks of delays the Shanghai-Hong Kong Stock Connect finally kicks off, giving international investors access to companies in the world's number two economy, while allowing mainland investors to trade shares in Hong Kong.

The link-up, which was described by the Hong Kong Monetary Authority (HKMA) as a "milestone", is seen as a key step towards greater financial liberalisation in China's economy as its leaders embark on a slow process of reform.

"It definitely is a game changer, it brings a new dimension to the market and new dynamics as well," Jackson Wong, associate director for Simsen International Financial Group in Hong Kong, told AFP, calling it a "win-win" situation.

"If all this goes well, China will probably put in more financial products, not only stocks," he said, explaining that foreign investors currently can only participate in the limited trading of Chinese financial products.

"The whole programme will attract more foreign funds. When you have more funds, that will help the stocks on both exchanges."

STRICT CONTROLS REMAIN

The scheme is expected to allow the equivalent of US$3.8 billion a day in cross-border transactions.

China's premier Li Keqiang announced plans for the project in April as part of Beijing's push to liberalise its economy and gradually to make the yuan more freely convertible.

But it is subject to strict limits in order to preserve capital controls in China, where Communist authorities keep a tight grip on the yuan currency.

If an investor buys stocks in the other market, when they sell the money can only go back to their home market account, a so-called "closed path" to prevent "hot money" leaking out.

Beijing has granted an initial cumulative quota of 250 billion yuan (US$41 billion) for trading of Hong Kong stocks, while 300 billion yuan will be allowed for the Shanghai market, with daily allowances of 10.5 and 13 billion yuan respectively.

In preparation for the launch the HKMA, Hong Kong's de facto central bank, on Wednesday said it would lift a daily cap for converting the local dollar to yuan to facilitate the trading link.

Analysts say the lifting of the limit will bring easier access to renminbi for local residents and encourage investors to use the currency.

The scheme is a long time in the making. A similar idea, the stock "Through Train", was floated in 2007 but derailed because of the global financial crisis.

And the latest plan was due to kick off last month but was delayed, with technical issues blamed.

However, while there is big interest in the programme, some Chinese traders are reticent.

"The two markets differ in terms of trading rules and time, so there's going to be a process of mutual adaptation," Jiang Shiqing, a Shanghai-based strategist with Industrial Securities told AFP.

"At (the) current stage, I have no intention (of buying Hong Kong stocks through the scheme). I want to put my limited funds in a market I'm more familiar with," Steven Zhou, an investor based in the eastern Chinese city of Wuxi, said.

AFP