Train from Shanghai to Hong Kong

The Shanghai-Hong Kong Stock Connect program opened Monday November 17, resulting in a surge in northbound financial flows from overseas investors into Shanghai. However, after the first two days of trading, activity dramatically declined in both directions, leading some to call the Shanghai-Hong Kong “Through Train” the “Ghost Train.” Northbound flows from Hong Kong to Shanghai declined from 13 billion RMB ($2.1 billion) on opening day to 2.6 billion RMB on Wednesday, November 19, while southbound flows from Shanghai to Hong Kong slowed to RMB 253 million. So, should we view Connect as a sizzle or fizzle?

One reason that some foreign institutional investors have not participated in Connect is that they wanted to monitor demand activity before investing. In addition, some investors have found Connect’s restrictions onerous. First, Connect only allows northbound investment in 568 designated stocks in Shanghai out of 971 listed stocks and southbound investment in 268 stocks on the Hong Kong stock exchange. This will likely not change in the short run. Second, the process for purchasing shares is indirect; for example, overseas investors wishing to purchase mainland shares must go through a Hong Kong broker, who connects with the Hong Kong Stock Exchange in order to access the Shanghai Stock Exchange.

Notably, after the People’s Bank of China cut the benchmark lending rate, Connect experienced an increase in activity once again. By Monday, November 24, international investors used over half of their daily $2.1 billion allowance to purchase stocks in mainland China. This may indicate that as mainland China’s economy in particular improves, Connect may see more participation.