Sep 25, 2016 - Shenzhen overtaking New York…really?

Foreign money flying directly to Chinese mainland equities as a part of financial markets reform are getting more and more precise shape. The end of summer festivities, the noise around BoJ and especially, discussions about FOMC (not) hiking overshadowed recently interesting news about approving Shenzhen-Hong Kong Connect by Chinese government. Well, sounds exotic but what does it actually mean?

Few facts

-          Foreign traders have limited possibilities to trade Chinese stocks despite some companies being listed in Hong Kong or New York

-          Chinese stocks are split in three main groups:

A-shares – denominated in Renminbi can be traded by local (mainland) investors on the Shanghai or Shenzhen stock exchanges

B-shares – domestically listed foreign investment shares denominated in foreign currencies that foreigners are allowed to trade under Chinese government restrictions on the Shanghai or Shenzhen stock exchanges

H-shares – shares of companies that are incorporated in mainland China and are traded in Hong Kong. The H-shares are usually traded at premium versus A-shares.

               

-          The Shanghai Stock Exchange – mostly heavy industry or materials companies and state-owned companies and banks are listed there. It did not experience any substantial increase in trading volumes after the Shanghai-Hong Kong connect was put in place in 2014.

So why is Shenzhen more appealing to foreign investors than Shanghai?

-          The Shenzhen Stock Exchange – mostly smaller companies from consumer staples, technology or healthcare are listed on its Main or SME board and overall, it is seen more as a “new economy” stock exchange. The trading volumes in its 880 stocks listed have risen by 80% since 2014.

What to expect?

-          If all goes as planned, the new Shenzhen-Hong Kong connect should be operational in Dec 2016, thus opening access to 80% of the Chinese stock market to foreign investors

-          As Chinese officials indicated the aggregate quotas for funds flows are to be removed as well it will provide investors with ample of new opportunities. It doesn’t mean that current restrictions put in place for Shanghai-Hong Kong connect are fully used but Shenzhen with its new economy titles will definitely be more attractive to foreign investors.

-          On the flip side the regulators are still very open to implement trading suspensions in case of market panic as we had witnessed back in Aug 2015

-          The PE ratio of 67 is a significant drawback for investors looking for value, thus challenging attractiveness and ability for future grow. But would you dare not to be exposed there…?

-          Also a no short-sales possibility of stocks may be an issue during market corrections as stock lending is almost inexistent in mainland China.

This event may not be fully recognized by the market at the moment but we see it as a new big kid on the block that will be able to change the rules of the game despite all of the above mentioned question marks. The main trigger will likely be the real chance of Chinese A-shares to be included in MSCI’s indices what may happen even before June 2017.

Well, any questions just ask…

Good luck Champs!

Mr Hawk

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. Contact: landoftradingATgmailDOTcom