A trading link between Shenzhen and Hong Kong may look good on paper, but it's likely to suffer the same fate as the Shanghai-Hong Kong Stock Connect unless Beijing changes the rules, analysts say.
This week, Chinese premier Li Keqiang hinted at a widely-anticipated cross-border trading program between Shenzhen and Hong Kong, but investors aren't overly excited. The program would likely be based on the existing Shanghai-Hong Kong Stock Connect, which met lukewarm success following its debut late last year.
For the first twenty trading days, average northbound quota usage on the Shanghai-Hong Kong Stock Connect – investors buying Shanghai-listed A-shares – was 25.3 percent of the daily quota, lower-than-expected. Meanwhile, southbound quota usage was just 4.5 percent of the daily quota.
"Investors have too many issues regarding the technicality of the existing Stock Connect, in particular custodial platforms," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole, referring to a practice where stocks are kept in brokers' names rather than clients' names.
Europe's principal fund regulator, Luxembourg's Commission de Surveillance du Secteur Financier (CSSF), prevented large funds from participating due to concerns that the system doesn't protect investors in the event the custodian bank goes bust.
Another major factor keeping foreign investors away is the requirement for investors selling A-shares in Hong Kong to deliver shares to brokers the day before the trade, a settlement cycle called 'T plus zero.'
"Unless there's a change in technical procedures for foreign investors, the Shenzhen-Hong Kong stock connect won't be any more successful than the first," Kowalczyk said.