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Traders predict HK-Shanghai stock link will take off

Anticipation is building up over a programme connecting the Shanghai and Hong Kong stock exchanges, known as the "through train". Despite some grumbling over quotas, traders predict the scheme will take off when it launches in October.

HONG KONG: Anticipation is building up over a programme connecting the Shanghai and Hong Kong stock exchanges, known as the "through train". Despite some grumbling over quotas, traders predict the scheme will take off when it launches in October. This is because A-shares, Chinese stocks restricted to the domestic market, are considered cheap.

Daily quotas and unclear tax rules were brought up as the main issues when Hong Kong Exchanges and Clearing conducted a connectivity test recently for the through-train scheme. Still, brokerage CLSA predicts that there will be an initial gold rush.

CLSA's global head of trading, Andy Maynard, said: "Despite all the problems with settlement, tax stance, and despite the cost, it is very likely that the through-train will be incredibly successful from the word 'go'. And the quota to be used up incredibly quickly in the first couple of days."

The scheme has been hailed as a major market development not just for Hong Kong and Shanghai, but for the world. In recent weeks, there have been record inflows into exchange-traded funds that invest in A-shares in a bid to catch the through train.

For the past couple of months, hedge funds have been parking their money in Hong Kong, hedging their bets and trading in anticipation that the valuation gap between A- and H-shares will narrow.

CASH Financial Services consultant, Peter Lai, said: "They're buying those H-shares in Hong Kong that are being traded at a big discount to the A-share market. And simultaneously, some of the China funds can short-sell A-shares in the A-share market and they have earned a very good premium without risk."

Mr Lai, a veteran market watcher, predicts that the through train will also help push the benchmark Shanghai Composite higher by 13 percent to 2,500-point level by the end of the year.

The Hang Seng index is expected to hit 26,000 points, up 4 percent from the current level. Some of the counters likely to benefit the most are Chinese blue-chips and consumer stocks that are not traded in Hong Kong.

CLSA's head of China-HK Strategy, Francis Cheung, said: "I would go for the A-share market, rank everything by free-cash flow yield, look at the best free-cash flow yield and free-cash flow growth and try to find the best quality management. And I would be buying those, because I know that mainland investors are not valuing the stock market quite the way the world is valuing stocks."

CLSA likes counters like white-goods maker Qingdao Haier, power-producer China Yangtze Power and automaker SAIC Motor Corp. Mr Cheung also predicts that regulators will also likely expand the programme to other bourses and commodities. According to Chinese media reports, a plan to connect the Hong Kong stock market with Shenzhen bourse, China's other stock market, has already been submitted for approval.