Shenzhen-Hong Kong Stock Connect to launch
The recent highlight in the stock market is the much anticipated approval of the establishment of mutual stock market access between Shenzhen and Hong Kong (Shenzhen-Hong Kong Stock Connect)*. Shenzhen-Hong Kong Stock Connect is expected to launch in four months. In addition to the existing 500 plus A-shares under Shanghai-Hong Kong Stock Connect, the launch of Shenzhen-Hong Kong Stock Connect will add more than 800 Shenzhen A-shares to the basket of eligible stocks.
More about Shenzhen A-shares
Eligible A-shares under Shenzhen-Hong Kong Stock Connect will include any constituent stock of the Shenzhen Stock Exchange (SZSE) Component Index and the SZSE Small/Mid Cap Innovation Index, which has a market capitalisation of RMB6 billion or above, and all the SZSE-listed shares of companies which have also issued H shares. However, during the initial stage of Shenzhen-Hong Kong Stock Connect, stocks from the SZSE's ChiNext Board will be opened for trading to institutional professional investors only.
Both Shanghai and Shenzhen A-share markets rank in the top stock exchanges worldwide in terms of market capitalisation. Here are the key differences between the two markets.
- Types of listed companies: Companies listed on the Shanghai A-share market are large cap in general and many of them are state-owned enterprises. The top 50 biggest companies listed on the Shanghai Stock Exchange (SSE) include many renowned companies under the resource, financial, insurance and infrastructure sectors. On the other hand, there are more private enterprises listed on the SZSE. Many of them are small and medium-size enterprises (SME) and high-tech firms which have relatively small cap. The Shenzhen A-share market offers more investment opportunity in the new businesses such as mobile games and live streaming.
- Valuation: Compared to the Shanghai A-share market, the Shenzhen A-share market has more SME and high-tech companies and their valuation are relatively high. According to the statistics of China Securities Index Co. Ltd., the average P/E ratio of the Shenzhen A-shares was 43 times during the current year, and the average P/E ratios of its SME board and ChiNext Board were 53 times and 83 times respectively. On the other hand, the average P/E ratio of the Shanghai A-shares was only 15 times during the current year.
- Turnover: According to the statistics of SSE and SZSE, the Shanghai and Shenzhen A-shares recorded daily average turnover of RMB200 billion and RMB340 billion respectively in the first 7 months this year. The share turnover velocity of the SZSE ranged from 3.3-4.7 times this year, higher than SSE which ranged from 1.5 times to 2.5 times, according to the World Federation of Exchanges.
The principal arrangements for Shenzhen-Hong Kong Stock Connect are made with reference to those under Shanghai-Hong Kong Stock Connect that means "home market principle" under the existing Shanghai-Hong Kong Stock Connect will be applicable to the upcoming Shenzhen-Hong Kong Stock Connect. Whether investing in A-shares through the Shanghai-Hong Kong Stock Connect or the Shenzhen-Hong Kong Stock Connect, investors should fully understand the trading rules and arrangements of the Mainland stock market. For example, the trading day and time are not the same between Mainland and Hong Kong; there is a 10% price limit for stocks listed on the Mainland stock market; day trading is not allowed in Mainland; and the trading under the two stock connects will not be covered by Hong Kong's Investor Compensation Fund, etc.
Investors should note that there are daily quotas under the two stock connects. But no aggregate quota under Shenzhen-Hong Kong Stock Connect and the aggregate quota under Shanghai-Hong Kong Stock Connect has also been abolished.
Currency and market volatility risks
A shares are traded and settled in RMB under the two stock connects. Investors should be aware of currency risks, in particular the RMB reversed from its rising trend since 2014. The RMB recorded a 4% depreciation against the Hong Kong dollar in the past year.
Additionally, the Shanghai and Shenzhen stock markets are dominated by retail investors which are generally more easily affected by market news and rumours, and as they tend to be speculative, this might result in higher volatility of the A-share market. Also, the Mainland stock market is sensitive to any changes in the policies and news of the Central Government.
*Please refer to the joint announcement of the China Securities Regulatory Commission and the Securities and Futures Commission issued on 16 August 2016.