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How to play the Shanghai-HK stock connect

CHINA STOCKS BREAK
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The countdown has begun for the launch of the Shanghai-Hong Kong stock connect, which is expected to be a positive catalyst for both markets, but how can investors position for the milestone cross-border trading link?

Hong Kong's Securities and Futures Commission and the China Securities Regulatory Commission this week announced the approval of the long-discussed scheme, also known as the "through train", which will kick off on November 17.

The program, a major step in China's efforts to open up its capital market, will allow foreign investors to place buy or sell orders on Shanghai's A-share market through brokers in Hong Kong. Chinese investors meanwhile will be able to use mainland brokers to invest in Hong Kong's H-share market.

Trading strategies

Analysts say the "A-and-H price difference" trade and the "scarcity" trade are the recommended strategies for trading the launch.

The former strategy pertains to bets on Chinese companies listed on both the Shanghai and Hong Kong Stock Exchanges. The trade involves buying A-shares that are discounted to their dual-listed H-share counterparts, or vice-versa. A-shares are listed in Shanghai and H-shares in Hong Kong.

"Across sectors there are still significant differences between A-share and H-share prices," said Steven Sun, head of China Equity Strategy at HSBC.

Hong Kong-listed H-shares that could catch up with their A-share peers include Chinese airlines, railway and power equipment manufacturers and commodity firms, Sun said. H-share airlines, for example, are trading at a 25 percent discount to their A-share counterparts, according to HSBC.

Read MoreShanghai-HK Connect to launch on November 17

The "scarcity" trade, meanwhile, involves picking stocks or sectors that are only available either in the Shanghai or Hong Kong market.

"Mainland Chinese investors will have access to over 200 pure Hong Kong stocks for the first time, with a total market cap of over $2 trillion," said Sun.

In Hong Kong, technology firms such as Tencent and Lenovo may benefit, in addition to gaming names such as Sands China and Galaxy Entertainment, and financials including AIA and People's Insurance Company of China (PICC), notes HSBC.

Read MoreA new way to get in on Chinese stocks

With the through-train scheme is expected to boost turnover in Hong Kong by 38 percent by 2015, according to BNP Paribas, some analysts recommend investing in companies that will benefit from increased volume of trades.

Deutsche Bank says Hong Kong Exchanges and Clearing (HKEx), CITIC securities and Haitong Securities, are good trades when employing this strategy.

Bigger things to come?

The integration of China's domestic A-share market and the Hong Kong stock market is big step that could eventually result in creating one of the world's largest stock markets, say analysts.

Read MoreWhy this market is escaping the global selloff

Currently, the scheme is limited to Shanghai, but many analysts anticipate it will extend to China's other stock exchange -- the Shenzhen bourse -- in a couple of years.

If that materializes, the combined market cap of all three exchanges would be worth over $7 trillion with an annual turnover of more than $9 trillion, according to HSBC, resulting in the world's second-largest equity market after the New York Stock Exchange.