Trading link is vital conduit in nation's capital market opening-up, say experts

The stock connect program between the Shenzhen and Hong Kong bourses, which was launched in 2016, has seen its trading volume expand over time to become an important conduit for the Chinese capital market's opening-up, experts said.

The Shenzhen-Hong Kong stock connect, which celebrated its third anniversary on Thursday, was launched two years after the successful operation of the Shanghai-Hong Kong stock connect, which was the first of its kind launched in 2014.

By Wednesday, the accumulated trading value of the Shenzhen-Hong Kong stock connect during the past three years was 9.42 trillion yuan ($1.34 trillion), according to Shanghai-based market tracker Wind Info. The total trading value so far this year has reached 5.11 trillion yuan, outnumbering the sum of the previous two years.

On the other hand, the Hong Kong stock market has also been buoyed by the stock connect mechanism. According to Hong Kong Exchanges and Clearing Ltd, the operator of the Hong Kong bourse, southbound trading volume－investment made by Chinese mainland investors in the Hong Kong stock market－has been valued at over HK$8.7 trillion ($1.1 trillion) cumulatively as of Oct 31. The Chinese mainland investors held about HK$999.5 billion worth of Hong Kong shares via the mechanism, up from the HK$13.1 billion in 2014.

Li Daxiao, chief economist of Yingda Securities, said that the bonding between the capital markets in Shenzhen and Hong Kong has been further strengthened with the stock connect program. Based on its success, more attempts to connect the capital markets in different regions using different currencies will be made possible in the near future, he said.

Over the past three years, the A-share market has attracted total cross-border capital inflows of more than 136.4 billion yuan via the Shenzhen-Hong Kong stock connect program. According to Yang Delong, chief economist of Shenzhen-based First Seafront Fund, the ongoing changes in investment style among the A-share market investors are more noticeable and important than capital inflows.

According to Yang, overseas investors have always focused on the primary operations of companies and stuck to long-term investment and value investment. The top 20 A-share listed companies that they have invested in the most heavily over the past three years have reported compound returns of 350 percent, which is way ahead of the average performance of most public companies and even the benchmark indexes.

As of Aug 31, 989 out of the 2,179 companies listed on the Shenzhen bourse were from the strategically emerging industries, according to public information.

"Overseas investors have shown preferences for A-share market listed technology, consumption and finance companies, which abound in the Shenzhen stock exchange. The higher-than-average return over the past three years shows that overseas investors are still more mature in choosing the right targets, experiences that domestic investor can learn from," said Yang.

Overseas investors have taken increasingly important roles in the A-share market. According to Swiss investment firm UBS, overseas investors had 1.77 trillion yuan worth of A shares by the end of September. That number equaled 3.2 percent of the total value of the A-share market, up from the 2.4 percent registered at the end of 2018.

The inclusion of the A-share market into leading global indexes such as the MSCI is another important impetus. According to UBS estimates, about 300 billion yuan of overseas capital will flow into the A-share market in 2020, if the A-share constituent in the MSCI remains unchanged.