HONG KONG (MarketWatch) — The much anticipated "through train" of mainland Chinese investment to Hong Kong appears back on track but it is still unclear how many investors will be boarding.
Last week's joint announcement by securities regulators in Hong Kong and Shanghai promises a pilot project in six months time, allowing investors to trade each other's stock markets. This marks the latest initiative by Beijing towards opening its capital account.
Shutterstock/Zhu Difeng But there was little evidence of a repeat of the euphoria when the "through train" idea was first floated in 2007 and helped send Hong Kong stocks to all-time highs, amid expectations of a wall of mainland money arriving.
Part of this is down to market conditions. Hong Kong equities are no longer trading at a steep discount to their Shanghai counterparts, which was a key justification for the earlier buying frenzy. And in contrast to that bull market, mainland Chinese equities have since been mired in a multi-year bear market. Not only has that soured many mainland investors to equities, Shanghai A-shares now often trade at a discount to dual-listed H-shares in Hong Kong.
Still, this pilot scheme offers something new to mainland investors. They can now invest in sectors of the economy which were previously off limits, giving more choice outside the old state-owned industries. This will include areas such as Macau gaming and Internet stocks. One of the largest, traded stocks in Hong Kong is Tencent (HK:0700) (TCTZF) , which is likely to be added to mainland portfolios.
The other factor keeping the "through train" on a slow track is mainland authorities.
Most signs suggest Beijing will adopt a cautious approach to opening China's capital account, despite an increasing number of initiatives to internationalize the yuan (USDCNY) . If investors need a benchmark, the Shanghai Free Trade Zone could be appropriate, which has been notably slow-moving. Capital Economics writes of the through train, "its longer-term impact and broader impact will probably be limited."
Indeed, already Hong Kong authorities appear to be reining in expectations.
Over the weekend, Hong Kong Financial Services Minister Chan Ka-Keung cautioned investors not to expect the quota on the 550 billion yuan ($88.3 billion) scheme would definitely be increased once it was filled. For now, the sums available are restricted but not insignificant, allowing up to 23.5 billion yuan of daily cross-border training.
This intervention comes after speculation that the pilot could be extended to other financial products, such as commodities, and would move Hong Kong more rapidly to a yuan-based economy.
A key reason to expect a cautious approach is the challenging macroeconomic backdrop facing China's government.
Any bold action, which might threaten financial stability is unlikely as Beijing works its way through a slowing and highly leveraged economy. In particular, recent weakness in the yuan has sparked concerns over an unraveling in a yuan carry trade and cross-border capital flows.
Notably in Hong Kong last week, HSBC (HK:0005) increased the interest it paid on yuan deposits. This again makes it likely authorities will go slow in encouraging offshore investment.
Given this sensitivity, it is perhaps not a surprise that this version of the through train involves traveling in both directions with a "northbound" and "southbound" trading link.
Stocks eligible in Hong Kong include both the Hang Seng Composite LargeCap and MidCap Indices, and shares of all companies listed on both Shanghai and Hong Kong markets. Meanwhile, the northbound stocks eligible will include all companies on the Shanghai Stock Exchange 180 Index and 380 Index.
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