Shenzhen Connect Offers Chinese Stocks. Will the World Buy?
HONG KONG — Global investors in two weeks will get direct access for the first time to the stock market in the Chinese city of Shenzhen, giving them a chance to bet on a tech-heavy clutch of private companies on an exchange sometimes called China’s Nasdaq.
But many investors will be skeptical, and the tale of Baofeng Group explains why.
A largely unknown tech firm that designs online video players, Baofeng conducted a modest debut on the Shenzhen exchange in March 2015. Over the next three months, its stock rose 4,200 percent.
The company went public at the height of China’s share market frenzy, as speculative investment in stocks became the national hobby. Vast fortunes were minted — Baofeng’s chief executive became a billionaire almost overnight.
Then, just as quickly, investors’ hopes were dashed. Chinese stocks imploded in June of that year. The government’s attempt to stem the losses with trading suspensions, bans on selling and a campaign of state-directed buying only added to the concerns of private investors.
Many fled the market and still remain on the sidelines more than a year later. As a result, shares of Baofeng — while up nearly 10 times from the day they began trading — are still down more than half from their year-ago peak.
“Every stock went down largely,” Wang Jing, an investor relations representative at Baofeng, said of the crash in an interview this month. “This has also had a big impact on the company.”
The long-awaited connection between the Shenzhen market and the rest of the world will be open on Dec. 5. The timing was announced Friday by the stock market operator in the nearby city of Hong Kong that will serve as the way point. The move is partly intended to give Baofeng, the rest of the Shenzhen market and Chinese stocks over all a shot in the arm.
Called the Shenzhen-Hong Kong Stock Connect, the venture opens a small door in China’s regulatory wall restricting money from moving across its borders. The plan, similar to one in Shanghai, allows investors in Hong Kong — a Chinese city long open to foreign investors — to buy and sell shares in Shenzhen, and vice versa.
The move is the latest test of China’s readiness to allow a more open financial system. Despite China’s status as the world’s second-biggest economy after the United States, the country’s financial markets are still comparatively immature.
The leadership in Beijing worries that easing its grip too fast could lead to destabilizing flows of funds in and out of the country. Programs like the Stock Connect are aimed at opening the door wider — but also at retaining state control over the pace of liberalization.
Analysts welcomed the move but questioned whether it would lift markets or lure much new investment. The main Shanghai share index has entered a bull market, having rallied more than 20 percent from its lows in January, but trading volumes remain a shadow of what they were during the boom.
Part of the reason is that China’s economic prospects have lost some of their luster, as growth has eased to its slowest pace in a quarter-century. At the same time, a weakening renminbi, the Chinese currency, has also reduced the attractiveness of investing in domestic shares.
“From the macro point of view there’s obviously a big hill to climb as far as potential renminbi depreciation and the economic outlook,” said Charles Salvador, director of investment solutions at Z-Ben Advisors, a consulting firm based in Shanghai. “However, I still find this to be a turning point in the overall scheme of things.”
“从宏观角度来看，就潜在的人民币贬值和经济前景而言，显然有一座大山要爬，”总部设在上海的泽奔商务咨询有限公司(Z-Ben Advisors)投资解决方案总监查尔斯·萨尔瓦多(Charles Salvador)说道。“然而，我还是觉得这是整体规划中的一个转折点。”
Opening up to more foreign money is a modest step toward fixing markets many regard as unreliable. In June, MSCI, a firm that compiles a widely tracked index of global emerging market stocks, declined for the second year in a row to add A-shares, or mainland stocks, to its benchmark index. It cited issues with international investors’ access to domestic Chinese markets.
If Shanghai is China’s answer to the New York Stock Exchange, the traditional home to big, blue-chip industrial and financial companies, then Shenzhen is the country’s answer to the tech-heavy Nasdaq.
Nicole Yuen, vice chairwoman and head of equities for greater China at Credit Suisse, said that around two-thirds of Shanghai’s stocks were state-owned companies, while in Shenzhen, the ratio was only about a quarter of stocks.
瑞信(Credit Suisse)大中华区副主席兼大中华区证券业务主管袁淑琴(Nicole Yuen)表示，沪市大约三分之二的上市公司是国企，而在深圳，这一比例仅为四分之一左右。
“The significance of Shenzhen Connect is it brings to the international market a whole new horizon of stocks that are much more representative of the future of China,” Ms. Yuen said this month, “as opposed to the Shanghai Connect, which is very much more a representation of the previous China, so to speak.”
Before the Shenzhen Connect, the only access foreign investors had to shares listed in the southern city was through the 14-year-old qualified foreign institutional investor program, known as Qfii, which is open only to large foreign funds or other big investors and entails a time-consuming approval process to invest or repatriate profits.
The new link will open the door to smaller and more active investors, like hedge funds, and give them quicker access to over 800 new stocks — many of them entrepreneurial tech firms.
Appetite for domestic shares “ has improved slightly from a very low level,” said Jian Shi Cortesi, an investment manager for Chinese equities based in Zurich at GAM, an asset management firm.
资产管理公司GAM驻苏黎世的中国股票投资经理科特茜(Jian Shi Cortesi)称，对国内股票的兴趣“和低点相比略有改善”。
Still, Ms. Cortesi added, “Shenzhen Connect is not likely to bring large inflows from foreign investors to push up A-share prices.”