So good, the Chinese did it twice. This week, regulators gave the go-ahead for Shenzhen-Hong Kong Stock Connect. The scheme, which mirrors one set up for Shanghai in late 2014, will allow overseas investors to buy A shares listed on China’s Shenzhen exchange. Both systems also permit mainland-based investors to buy shares listed in Hong Kong. After the announcement the indices remained flat, but the scheme is still significant.
Shenzhen Connect will add 880 stocks to the list of nearly 600 available in Shanghai, giving access to three-quarters of the mainland-listed universe. The quality is even more noteworthy. Shanghai’s exchange has a far higher presence of stodgy state-owned enterprises; less than one-third of the index consists of privately established companies. Three-quarters of Shenzhen’s index, by contrast, comprises non-SOEs. Many of these are in higher growth “new economy” sectors, such as healthcare and technology, giving overseas investors more ways to express their views on China’s economy.
Foreign investors will also become more familiar with China’s retail investors. Goldman Sachs notes that nearly two-thirds of the index by market capitalisation is owned by individuals, compared with one-third of Shanghai. The high retail participation shows in lofty valuations, as well as high turnover relative to the market’s size.