In one of the China’s biggest capital market reforms in recent years, its government has finally sanctioned the long-awaited ‘Shenzhen-Hong Kong Stock Connect’ program – and it could mean big implications for global investors eager to get a stake in the world’s second-largest economy.
Although the authorities are yet to divulge any details of the program including the launch date, they have confirmed on a government website that the preparatory work of the program is largely complete, and the draft plan for implementation has been approved.
What is Shenzhen-Hong Kong Connect Exchange?
The so-called “Connect” program, the second such program following the Shanghai-Hong Kong Stock Connect of 2014, is a trading link to connect the giant stock markets of Shenzhen and Hong Kong. It is thus yet another bridge between the mainland and the offshore stock markets.
Once operational, the exchange is expected to allow Hong Kong investors to buy shares on the technology-oriented Shenzhen exchange, while at the same time giving Chinese investors access to Hong Kong equities.
Furthermore, the connection of exchanges is expected to help the Chinese economy attract a host of new foreign investors, as the new program is expected to provide access to a new territory of Chinese tech stocks that global investors weren’t able tap on until now. It could also help in creating a very convenient road for foreign institutional and retail investors to access the mainland equities market, giving them access to the fastest-growing Chinese companies that operate in sectors such as technology, pharmaceuticals and clean energy, among others. Once operational, it would place some 880 Shenzhen-listed stocks, worth more than $1 trillion in market cap, onto the menu of global investors. All in all, it could mean greater demand for equities, which is a tailwind for prices.
Bottom Line for Investors
The addition of the Shenzhen Stock Exchange is viewed broadly as a major step towards liberalizing two key mainland markets for the global financial industry. But the launch was tarnished by a few glitches like daily trading quota, regulatory and tax issues among others. As such, investors are clearly not convinced that the Shenzhen connect is going to radically change the dynamic of investing in China from day one.
What’s more, China has a questionable record of intervening in the stock market and investors remember the recent drama surrounding currency devaluations, so there is a long way to go before confidence fully builds. China’s economic growth is also a worry. But at the end of the day, a small step is still a step, and it is our belief that the more open and free a market is allowed to operate, the better off it will be over time.
As China’s market faces turbulent times, many investors are curious what this could mean for global investments overtime. Instead of worrying about the “What Ifs” that the future may hold, at Zacks Investment Management we focus on the hard data to provide the best context for investing decisions. If you want to get an inside look into what we are seeing, download our Stock Market Outlook Report by clicking on the link below
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