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Shenzhen-Hong Kong stock link may see fourth quarter launch

Steve Sun, head of Hong Kong and mainland equity research at the Hong Kong and Shanghai Banking Corporation (HSBC), said in a media briefing on Friday that an official announcement of the “through train” in the coming weeks followed by implementation around September is the most likely scenario.

According to HSBC’s report, eligible stocks listed on the Shenzhen Stock Exchange (SZSE) will include members of the Mainboard, SME Board and ChiNext, and the SZSE 1000 Index is the most likely universe for the northbound trading of the Shenzhen-Hong Kong Stock Connect.

An expansion of the investable universe by including Hang Seng Small Cap Index constituents for southbound trading of the new program is expected by HSBC and the quota for northbound and southbound trading could be around 250 billion yuan (US$37.40 billion) and 200 billion yuan, respectively.

Sun believes that getting the Shenzhen-Hong Kong Stock Connect off the ground will help to improve global investors’ access to the A-share market, one of the key considerations for MSCI A-share inclusion.

In the meantime, Sun also expects the quota for northbound and southbound trading of the Shanghai-Hong Kong Stock Connect to be increased by around 50 billion yuan to 350 billion yuan and 300 billion yuan, respectively.

Given the expectation of the second “through train” to be launched in the coming weeks, HSBC reiterated its 12 months rolling index targets of Hang Seng Index at 21,000 points, implying an upside of one to 15 percent, and Hang Seng China Enterprise Index to be 10,000 points. HSBC prefers “new economy” over “old economy” sectors and overweights IT and healthcare and underweights telecommunications.

Talking about the heat spread between A and H shares, Sun mentioned that liquidity in the Chinese mainland equity market is higher than in Hong Kong; therefore A shares have higher valuation and premium and the expectation of renminbi depreciation is also reflected in the valuation of A and H shares. And he predicts the reminbi against the U.S. dollar rate to reach 6.9 by the end of this year, while the rate is expected to be 7.2 next year.

The UK’s decision to leave the EU is creating the global economic uncertainties currently. As to that, Sun said the situation will likely dampen the outlook for U.S. investment spending and a stronger average U.S. dollar exchange rate has the potential to slow U.S. GDP growth and lower inflation; consequently, he doesn’t look for a Fed rate hike this year and sees only one hike around mid-2017.

Sun also pointed out that Chinese equities, particularly A-shares, are relatively better placed after the UK’s EU referendum due to currency and macro stability.

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