Stocks of high-technology and startup companies will likely get a boost with the planned launch of a trading link between the exchanges in Hong Kong and Shenzhen, home to many Chinese information technology and software enterprises.
The Shenzhen Stock Exchange has completed a plan for the program and started technical preparations for the trading link, which will allow investors in Shenzhen and Hong Kong to trade shares in each other’s markets, according to Song Liping, general manger of the bourse.
This program follows the Shanghai-Hong Kong Stock Connect as part of China’s drive to open its capital markets to overseas investors without fully liberalizing its capital account.
Eligible stocks under the program will include not only blue chips listed on the main board but also small-cap stocks of young and innovative companies listed on the Shenzhen bourse, Song told reporters in Beijing on March 8.
Hopes are that the link will inject excitement into the Shenzhen market. There has been rising demand by overseas investors to allocate more assets into China’s innovative or consumption-driven companies, which are believed to benefit from the country’s economic transition.
Qualified foreign institutional investors have increased investment in stocks listed in Shenzhen from 50 billion yuan ($7.98 billion) to 160 billion yuan over the past three years. One-third of that investment has been in small and medium-sized companies and startups, Song said.
“We will gradually expand the list of eligible stocks in line with demand from overseas investors,” she said.
No definite launch date has been announced, but Xiao Gang, chairman of the China Securities Regulatory Commission, has said that the link will be approved and launched this year.
The SSE will organize roadshows to boost the appeal of its stocks in overseas markets once the list of issues available to overseas investors is finalized, Song said.
The Shenzhen-Hong Kong Stock Connect is seen as another step for China to integrate itself with the global financial world. It will create a much wider spectrum of investable Chinese stocks for overseas investors, from blue chips of State-owned enterprises to smaller stocks of private and innovative companies.
The Shanghai-Hong Kong link has seen light turnover since its launch last November, partly due to the limited options. Only large blue chips are available to overseas investors.
Analysts have said that the new link will give investors a more diverse pool of equities for their portfolios. The total investment quota under the program is expected to reach 300 billion yuan.
Some observers, however, have expressed concern that the market may become more volatile after the launch of the link, because small-cap shares in Shenzhen have been more prone to manipulation.