Will Shenzhen-Hong Kong Stock Connect absorb capital from the rest of Asia?

HONG KONG - China is rapidly opening up its capital account to the rest of the world, or so it appears based on the announcement of the Shenzhen-Hong Kong (HK) Stock Connect, says Natixis, the French corporate and investment bank. “What is clear is that the combined market cap of Shanghai and Shenzhen will make (the market) the second largest in the world, above Japan’s.” Natixis says.

“Even adding together all the ASEAN stock markets, China is still more than twice as big in terms of market cap. What is not so clear is whether this will herald more capital inflows for China, as the Shanghai-HK experience shows that more is going Southbound than Northbound.

“What differentiates the Shenzhen Index from the Shanghai one is the predominance of tech stocks. And investors will have to pay for it as valuations are the highest in Asia.

“Although this can be re-valued, more fundamental to future flows to China is actual reforms to the capital account to reassure investors of the management of markets.

“We believe that the rest of emerging Asia does not need to worry, as both demand for diversification from China, and valuation, still make a compelling case for investment elsewhere. www.natixis.com (ATI).