April 11, 2014 / 8:35 AM / 4 years ago

New China cross-border plan game changer for equity markets

* Investors optimistic scheme to fare better than past attempt

* Turnover set to rise on stock exchanges

* Gap between prices of A- and H-shares to dwindle

By Saikat Chatterjee and Michelle Chen

HONG KONG, April 11 (Reuters) - A move to allow investors in Hong Kong and Shanghai to trade in each other’s equity markets has a real chance of success thanks to the yuan’s increasing global role, and throws a lifeline to stock exchanges and brokerages in the two financial capitals.

Regulators in China and Hong Kong surprised market participants on Thursday by unveiling a cross-border stock investment scheme, banking on the success of the promotion of the internationalisation of the Chinese currency since 2010.

The initiative, known as the Shanghai-Hong Kong Stock Connect, is the latest in a series of financial sector reforms that regulators have taken this year, such as widening the yuan’s trading band and increasing quotas for investors.

“Preparation this time is sufficient and the market condition is mature, which will likely lead to a success of the scheme unlike the last time,” said Ben Zhang, managing director at Haitong International, an asset management company in Hong Kong.

“This scheme is also in line with the whole renminbi internationalisation process.”

China said it would allow cross-border stock investment between Shanghai and Hong Kong limited to an overall quota of 550 billion yuan ($88 billion) and the preparation would take about six months.

Investors are far more optimistic about the success of the scheme this time around after a failed attempt in 2007, when regulators had to bring down the curtain quickly on a pilot programme amid concerns over frothy market valuations.

The optimism is due to the big strides taken in seeding an offshore yuan market in Hong Kong and establishing strong infrastructure links with the mainland in recent years.

The new plan is also far less restrictive than the current option to buy mainland equities via quotas, as the latter requires an investment track record and is only available to institutional players and requires regulatory approval.

Under a foreign currency-denominated quota, investors can buy $150 billion in domestic assets while under a yuan-denominated quota, they can buy 270 billion yuan worth. Both quotas are underutilised due to strict requirements.

Conversely, for mainland investors, the new scheme opens up an array of investment options as they can now buy Macau-listed stocks, social-networking giant Tencent Holdings Ltd and AIA Group Ltd, Asia’s No. 3 insurer by market value.

The move is expected to whittle away at the spread for dual-listed stocks, with analysts expecting prices of mainland-listed A-shares and Hong Kong-listed H-shares to move more closely together in the near term.

Trading activity is set to remain hectic in counters with a significant gap between these markets, with arbitrage funds sniffing at opportunities to exploit the gaps.

The quotas are sizeable compared with daily turnover on the Hong Kong stock exchange, which has seen dwindling revenues from stock broking in recent years, and for mainland indexes, which are trading at some of their lowest valuations in a decade.

Citi analysts estimate the presence of mainland investors in Hong Kong could bump up daily turnover by more than 10 percent, representing a boost in revenues for the Hong Kong bourse. Shares of Hong Kong Exchanges and Clearing Ltd jumped more than 10 percent on Friday on those hopes. ($1 = 6.2125 Chinese Yuan) (Editing by Chris Gallagher)

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