The Shanghai-Hong Kong stock connect got under way on Monday, November 17th. This new financial endeavor allows foreign investors to directly purchase individual shares of 560 Chinese mainland stocks. Anyone who opens a brokerage account with a firm in Hong Kong will be able to own a wide band of mainland Chinese shares. They can do this because there will be a direct link between the Hong Kong Stock Exchange and the Shanghai Stock Exchange. This stock exchange link-up is one of the biggest developments in years for investors in international markets.
Trading of Shanghai shares via Hong Kong will be open to all Hong Kong and overseas investors, institutions and individuals; trading of Hong Kong shares via Shanghai will be open to all mainland institutions and individuals with at least 500,000 yuan ($80,000) in a trading account.
U.S Investors
The introduction of this stock connect is important to U.S. investors who up to now have been able to buy some of the mainland shares only through ETFs like the Market Vectors China ETF (PEK) and the Deutsche X-trackers (ASHR). But these are baskets of stocks pegged to indexes, not individual shares. Now they will be able to expand their investments practically without any limitations or restrictions.
In addition, the Chinese stocks that were available to U.S. investors in the past--those listed in Hong Kong or those that are dual-listed in the U.S. and China- were mostly large, government-owned enterprises, primarily big banks and commodity companies.
There are plenty of companies that cater to the consumer in China that until now were off limits to foreign investors such as builders, telecom, energy, smaller banks and consumer companies. Furthermore, with China being way ahead of everyone when it comes to social media and online purchasing, the U.S. is eager to get in on the action of China’s new online economy.
China has managed to largely skip the step of setting up retail infrastructures and has gone straight to online marketing. The phone industry, for example has gone wireless without having to build a massive wire line structure such as the U.S. has developed. This change in approach now gives investors access to smaller companies which until now were off limits to them.
Chinese Bond Market
In addition, China's bond market has started opening up. Market Vectors has launched a bond ETF focused exclusively on Chinese bonds traded in mainland China--the ChinaAMC China Bond ETF (CBON). CBON is based on an index that comprises 1,446 bonds of 244 Chinese issuers. U.S. is still the largest bond market in the world with about $17 trillion, but China is rapidly moving up at $5 trillion (Japan is second at $10 trillion, Germany is $4 trillion).
Here’s how trading on the Shanghai-Hong Kong stock connect will work: Investors in Hong Kong and abroad will trade through a choice of Hong Kong brokers that will send the order to HKEx, which then passes it on to Shanghai. The process is mirrored when mainland participants trade Hong Kong shares. Shanghai shares remain in Shanghai and are held in trust by a broker or custodian on behalf of the foreign investors. Hong Kong shares remain in Hong Kong, and are held in trust by a broker or custodian on behalf of mainland Chinese investors.
Estimates indicate that Hong Kong's average daily turnover is about 30 billion yuan and Shanghai's is about 71 billion yuan. In the long term, some analysts believe this new scheme can be offered to other asset classes and exchanges like Shenzhen.
In the short term, the scheme is expected to generate a surge in Hong Kong trading volumes and a smaller impact in Shanghai. Analysts say it has the potential to create the world's third-largest stock market when and if the two boards are fully integrated.