Shenzhen-HK Connect to prove highly beneficial

Eddy Li argues that stock connects between the mainland and Hong Kong will help promote the SAR as an asset management center while enabling it to better participate in the country's Belt and Road Initiative.

The much-anticipated Shenzhen-Hong Kong Stock Connect, which links the mainland's southernmost stock exchange with the SAR's, made its debut on Monday.

With the official launch of Shenzhen Connect, there will be nearly 2,000 shares in total which could be mutually invested by both Hong Kong and mainland investors, including 568 of Shanghai's A shares, 881 of Shenzhen's A shares, and 417 of Hong Kong stocks. This will definitely reinforce Hong Kong's position as an international finance center and the center of offshore renminbi business. It shows the strong support of the central government to Hong Kong.

For the mainland, the Shanghai-Hong Kong Stock Connect is just a pilot experiment to explore the stock market. Since its start on Nov 17, 2014, despite the dramatic and disastrous fluctuations in stock markets on the mainland, the Shanghai Connect operations have generally gone quite smoothly. Benefitting from the experience of the Shanghai Connect, the Shenzhen Connect should therefore be more stable and flexible.

The biggest modification of the Shenzhen Connect is the cancellation of investment limits. These have also been canceled for the Shanghai Connect. This will greatly facilitate investment as well as boost the internationalization of renminbi. With Britain negatively affected by Brexit, Hong Kong's position as the center of the offshore renminbi business will be much improved.

Although there are no longer any limitations on the total amount of investment, the market is not 100 percent open yet. Both the Shanghai and Shenzhen Connects keep the daily quota - 13 billion yuan ($1.89 billion, or HK$14.65 billion) for Hong Kong investors and 10.5 billion yuan for mainland investors - to control cross-boundary fund flows. It will very much depend on the maturity and stability of the mainland's financial markets as to whether this quota can be relaxed or even revoked.

According to the accumulated data of the Shanghai Connect, the southward flow of funds is noticeably greater than the northward flow. This leads to the phenomenon of mainland capital swarming into Hong Kong. I believe this will also be the case for the Shenzhen Connect, especially as the renminbi continues to devaluate. More and more mainland investments are expected to hedge with Hong Kong stocks against further devaluation of the renminbi, as the Hong Kong dollar is linked to the US dollar.

But I also believe Hong Kong investors will prefer to buy Shenzhen shares rather than Shanghai ones. As we all know, with creative industries enjoying a rapid expansion in Shenzhen, the Shenzhen Stock Exchange is abundant with the stocks of emerging industries, such as information technology and media, which will be more attractive for overseas investors. Moreover, the geographical proximity between Hong Kong and Shenzhen will introduces investors to a more familiar market. The reaction to all this is therefore likely to be more positive.

Hong Kong's stock market is quite mature after decades of operations, and is attractive to many investors with generally reasonable PE (price-earnings) ratios and close surveillance. The connect between the mainland and Hong Kong stock markets will not only bring investment to our city, it will also promote Hong Kong as an asset management center in Asia and enable Hong Kong to participate more actively in the Belt and Road Initiative.

This is not the first time for Hong Kong to enjoy the central government's preferential policy in the finance sector. The advantage Hong Kong enjoys in the "One Country, Two Systems" policy is much envied by other financial markets. For foreign competitors, Hong Kong belongs to the "One Country", which will provide policies beneficial to us; and for mainland cities, Hong Kong is advantageous in adopting a different system.