UPDATE 2-China approves Shenzhen-Hong Kong stock link, scraps limits

* Second link unlikely to trigger demand for mainland stocks

* Scheme seen positive in longer term

* Southbound usage grows on Hong Kong-Shanghai Connect

* Aggregate quota limits scrapped (Adds comments from HKEx press conference)

By Michelle Price

HONG KONG, Aug 16 (Reuters) - In the biggest capital market reforms since last year’s stock market crash, China approved the launch of a long-awaited scheme to allow stock trading between Hong Kong and Shenzhen, the world’s second-busiest, and tech-heavy, exchange.

It also scrapped overall quota limits for an earlier scheme linking Hong Kong to the Shanghai stock exchange, and said there were no overall limits for the new scheme - a restriction that has been a sticking point for big institutional investors on market access issues.

By giving the green light to the final links of an ambitious plan to connect Hong Kong to China’s mainland markets - giving foreign investors more exposure to Chinese stocks - Beijing appears to strengthen its case for the inclusion of Chinese shares in global index providers such as MSCI.

“Shenzhen Connect should move China further along the road to MSCI inclusion. We see this announcement as a significant catalyst for Chinese markets,” said Douglas Morton, head of Asia research at Northern Trust Capital Markets.

The Shenzhen Connect scheme had been expected to go live more than a year ago, but was put on hold by last year’s market crash, which saw stocks slump around 40 percent and a raft of interventionist measures unleashed to prop up markets.

Though the actual launch is unlikely to trigger an avalanche of funds into China’s stock markets - given relatively expensive valuations and a slowing economy - mainland Chinese investors will likely cheer another option to diversify away from weak onshore stock markets.

“Foreign investors are still taking a wait-and-see approach to (mainland Chinese-listed) A-share investment as they are yet to regain confidence in the mainland stock market,” said Liao Qun, China chief economist at Citic Bank International in Hong Kong.

Mainland Chinese investors have sought out Hong Kong shares via the Shanghai-Hong Kong connect scheme, launched in late 2014, in a bid to buy non-yuan denominated assets amid fears over a weakening currency.

As of Tuesday, southbound quota usage was more than 80 percent, while take-up from Hong Kong of the northbound quota was around 50 percent.

“In terms of changes, the most important and significant is the abolishment of the aggregate quota,” Charles Li, CEO of Hong Kong Exchanges & Clearing said at a news conference.

Li said the new link would be launched by Christmas if not sooner, and the Hong Kong bourse expected Shenzhen trading to be subject to the same tax treatment in China as under the Shanghai connect scheme.


Shenzhen had 1,790 listed stocks as of end-July, several hundred more than Shanghai. Shenzhen is Asia’s busiest exchange, with monthly turnover topping $1 trillion. Its average daily turnover ranks behind only the New York Stock Exchange, according to the World Federation of Exchanges data.

While Shanghai is heavily skewed to financial stocks, Shenzhen is a centre for China’s fast-growing technology sector, with IT stocks making up almost a quarter of the total.

Both Shenzhen and Shanghai stocks have fallen around 12 percent so far this year, while an index measuring the performance of Asian shares is up nearly 10 percent. Hong Kong is flat for the year.

Despite the underperformance, stocks in Shenzhen trade at higher multiples, with the broader market trading at a price-to-earnings ratio of 36 times versus Hong Kong’s P/E of less than 12.

“In the short term, I very much doubt this will drive significant flows into Shenzhen shares as a lot of stocks are expensive,” said Caroline Yu Maurer, head of Greater China equities at BNP Paribas Investment Partners.

In Hong Kong, there is likely to be interest on Wednesday in brokerage stocks such as Haitong International, China Galaxy, Huatai Securities (6886.HK), CITIC Securities and Central China Securities. (Reporting by Michelle Price, with additional reporting by Pete Sweeney and Samuel Shen in SHANGHAI, Michelle Chen in HONG KONG and Vikram Subhedar in LONDON; Writing by Saikat Chatterjee; Editing by Jacqueline Wong and Ian Geoghegan)