What the Shanghai-Hong Kong exchange link means for IR

Nov 10, 2014
<p>Cross-border stock program will have implications for what investors need to know, says NASDAQ&rsquo;s Esther Luo<em><br /> </em></p>

The long-planned link between the stock exchanges of Shanghai and Hong Kong will start on November 17, regulators announced today, allowing a net 23.5 bn yuan ($3.8 bn) of cross-border share purchases to be made daily.

Following a successful pilot scheme in April, the connection between the two – named Stock Connect – was expected to take place in late October, but was delayed after neither exchange received regulatory approval for the move. The China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission are said to have since agreed on the terms of the deal, which will also give foreign investors greater access to companies in mainland China.

Esther Luo, head of advisory services for NASDAQ’s Greater China division, says that the program is a ‘great opportunity’ for IROs to consider the ‘changes and impact it will have on their communications, planning, shareholder structure – well, everything.’

Companies in Hong Kong and China are fundamentally different when it comes to shareholders, Luo says. ‘For example, in mainland China the majority of the shareholder base will be driven by retail investors, who have a shorter holding period, and market volatility is at least double that of the Hong Kong market,’ she continues,‘ she explains.

Foreign ownership of Chinese companies also sits between 1.5 and 2 percent, compared with as much as 30 percent in developing markets such as Brazil or South Korea. Investors in Hong Kong firms, meanwhile, tend to be long-term and institutional. ‘They’re more focused on long-term growth and are far less volatile,’ Luo notes.

More significantly, these characteristics could change as shares are passed not only between the Hong Kong and Shanghai exchanges, but between foreign investors too. ‘IROs need to pay attention and anticipate how [Stock Connect] is going to shape what’s happening in the next six months: how it will affect their shareholder base, how they can target new investors and [how they can] manage increased volatility,’ Luo says. ‘For Chinese companies, for example, they may need to learn how to market more to foreign investors, who have higher standards for corporate governance, transparency and compliance issues. All these topics should be the focus for future communications in order to stand out in the competition for foreign, long-term capital.’

Foreign investors may also have differing interests to domestic shareholders. Hong Kong has several media, technology or gambling companies, which, in the short term, could attract a lot of Chinese investors. For overseas investors, on the other hand, attractive Shanghai companies are those in new energy, automotive and defense, which are both ‘quite unique’ to the region and can provide better diversification for portfolios, Luo notes. ‘There are quite a few things that need to be closely monitored – potential buyers and sellers, how and why share prices are increasing or decreasing – so there are many more things for IROs to do,’ she adds.

‘Because everything in the market is moving so quickly, the most critical thing to do is to have plans for different scenarios planned ahead, and once timely intelligence is available you may need to change your planning or filter your message through the market quickly,’ Luo advises. ‘If you can get ahead of the market, you can make the most of this opportunity; if you’re behind, you’d be potentially opening yourself up to far more risk.’

Finally, IROs should keep a wary eye out for new products launched to take advantage of the opportunities offered by cross-border trading, such as Asian-focused ETFs. ‘As all of these are new to the market, IROs need to be cautious to their potential impact,’ Luo explains.

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