Research and analysis

China - Premier Li pushes reform and Shenzhen Hong Kong Connect

Published 26 January 2015

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 1 August 2016

This article is no longer current. Please refer to Overseas Business Risk - China

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk - China

Summary

Premier Li used a Guangdong visit in early January to focus on innovation and greater economic openness. His support for a Shenzhen Hong Kong Stock Connect rallied both stock markets, while the launch of China’s first internet based bank seeks to propel forward what is still a conservatively regulated industry. Strong commitment to faster reform.

Detail

Support for a Shenzhen Hong Kong Connect

Premier Li’s supported a ‘Shenzhen-Hong Kong Stock Connect’ (SZHKSC) when he met with Shenzhen’s Mayor Xu Qin. This has excited South China watchers – and the markets. If realised, the SZHKSC would likely enable international investors to access Shenzhen’s A-share market (presently off-limits to those outside the Mainland) through Hong Kong, and Mainland investors to invest in Hong Kong. The SZSE Component Index housed by the Shenzhen Stock Exchange (SZSE) responded with a 4.59% jump on the day, a 40 month high; and the 17 stocks listed both in the Shenzhen and Hong Kong exchanges rallied by an average of 6%.

SZHKSC has been mooted as the next logical step to the Shanghai-Hong Kong Stock Connect for months. Li’s anticipation - and subsequent support from Hong Kong’s Chief Executive - suggests it is more imminent than expected. SZSE has stated that they are jointly working with the Hong Kong Stock Exchange on a technical plan to submit to regulators which will take at least six months

There are good reasons for market excitement:

• By market capitalisation SZSE ranks 8th worldwide, and 4th by turnover as of December 2014;

• SZSE has grown 400% over the past seven years, as against around 120% for the Shanghai stock Exchange (SSE).

• Some are dubbing SZSE “China’s Nasdaq” in that, unlike the SOE dominated Shanghai Stock Exchange, SZSE houses smaller, newer companies that are oriented to new and exciting technologies.

• Geographic proximity and familiarity between Hong Kong and Shenzhen companies and investors could lead to more vibrant and balanced cross border flows than seen to date with the SHKSC.

Equally market experts urge caution on the timing of a SZHKSC. Smaller listings, governance issues, investor protection, speculative trading and market manipulation are all issues that need to first be tackled.

‘Webank’ will use big data to provide loans over the internet

Premier Li also witnessed the launch of China’s first purely internet-based bank WeBank. The bank will break new ground by using data compiled by its largest shareholder Tencent (one of China’s internet giants with companies akin to WhatApp, Facebook and eBay under its umbrella) to assess the credit risk of its clients. WeBank is one of five private banks in a pilot program to open up China’s state dominated banking sector, by offering wholesale deposits and small loans to SMEs via internet technologies. Along with his plan to speed up reforms in traditional financial institutions, the Premier encouraged these new banks to help address the chronic financing difficulties faced by China’s SMEs.

Policy Experiments to Unleash Market Forces

The Premier emphasised the need for policy reforms to underpin all these developments. Li encouraged local officials to explore greater openness, with the promise of larger tolerance by Beijing of potential policy failures. In Guangzhou’s Nansha Zone which forms part of the newly announced Guangdong FTZ, the Premier praised replacing pre-entry administrative approvals, by effective regulation of companies after they have made the investments.

Although the Premier did visit sites that form part of a developing Guangdong FTZ, mainstream media has downplayed any implications for related policy planning. Two years ago Li made his New Year trip to Shanghai with a clear focus on FTZ, and the Shanghai FTZ officially launched five months after his visit. There are another two FTZs developing in Tianjin and Fujian as well as for Guangdong.

Comment

Li’s announcement on the SZHKSC is a vote of confidence in how Hong Kong has handled the launch of the Connect with Shanghai, and would further cement Hong Kong’s role in China’s financial liberalisation and reforms. UK financial institutions which have long-standing interests in Hong Kong stand to benefit, with HSBC’s Hong Kong CEO describing SZHKSC as a “game changer” for Hong Kong. Developments in internet banking are also an important step for China’s financial system. With lending rates still controlled, state owned banks have historically had little incentive to lend to higher risk SMEs, who account for over 90% of Chinese enterprises. Internet based banks with access to ‘big data’ could provide the answer. Webank also counts among the growing list of innovative companies where China is ahead of the West.

Disclaimer

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