On November 17th, the long awaited Shanghai-Hong Kong Stock Connect launched, connecting Mainland China’s capital markets with Hong Kong in a way never seen before.Before the new investment channel link, individual investors could only participate indirectly in financial securities in the Mainland, such as specific funds and ETFs. The Shanghai-Hong Kong Stock Connect, however, now allows investors to trade securities in a range of listed stocks in each both markets through their respective securities companies. This helps to promote and strengthen the connection between the two markets.There is still a big disconnect between dual-listed companies traded in both Shanghai and Hong Kong. Some expected deeply discounted shares trading in Hong Kong to converge with their corresponding values on the Mainland. However, it is also true that shares are not directly fungible, which means that arbitrage is not possible.It is expected that the Shenzhen Exchange will follow suit in the future if the Stock Connect is deemed successful. With all three merged, it would create the 2nd largest exchange in the world with a market capitalization of $7.5 trillion. While not yet passing the NYSE in value, the combined exchange would be bigger than the NASDAQ which has a market capitalization of $7.3 trillion.
As I previously commented: Let me say that I am in FAVOR of cross listings. That’s because in theory this allows savings to finance investments or simply connects capital with economic opportunities regardless of state defined boundaries. But with the way central banks across the globe has been distorting capital markets, cross listing (part of financial globalization) has become conduits of bubbles. Therefore I am suspicious of the timing of such liberalization.
Ideally, trade and finance should have no boundaries. Money should flow where it is treated best. But it is a different thing when “liberalization” has been utilized to inflate a bubble such that when bubbles burst, the blame will fall on the markets.
Nonetheless find below a nice infographic of the Shanghai-Hong Kong Stock Connect from the Visual Capitalist
Courtesy of: Visual Capitalist
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