While it is too early to judge on the success or failure of the Hong Kong-Shanghai Connect between both stock exchanges, financial analyst Sara Hsu says the first signs are not living up to the initial hype, in The Diplomat. It is an important first step, she writes.
Although the Connect program may not have been as wildly successful as had been anticipated, it is an important step in opening up the capital account and will likely experience more traffic as China’s stock market deepens and as Chinese investors become savvier.
China’s stock market, though increasingly efficient, does not represent a sufficiently diverse range of companies, particularly in Shanghai. Approval of stock listings is tightly controlled, and small and medium enterprises, while listed in Shenzhen, are not well represented on the Shanghai exchange, which contains many state-owned enterprises. State-owned enterprises, while undergoing reforms, continue to be over-indebted and have faced declining profitability in recent years. According to HSBC, SOE’s average debt to asset ratio is 65 percent, above the generally acceptable range of 40-60 percent.
As the stock market faces reforms, and as more profitable opportunities arise, it is only logical that the Connect program, particularly northbound activity, will experience a rise in popularity. Southbound activity will increase as mainland Chinese investors seek diversification, and also as mainland stock prices rise closer to levels seen on the Hong Kong exchange. Right now, Hong Kong stocks are not necessarily viewed as a good value. Mainland investors are highly restricted in international financial investment and have little experience in this area.
So, sizzle or fizzle? It’s too early to say. Perhaps a slow burn as China’s financial economy deepens. If the financial reforms promised in the Third Plenum meeting last year are truly implemented, Connect may prove a valuable resource for Chinese, Hong Kong, and international investors alike.
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