HSBC Tips for the new SZSC

Exploring the 3 opportunities by investing in SZSC

Bringing you 3 opportunities by investing in SZSC: The unique stock sectors in Shenzhen, managing investment risks through diversification and tapping into China stock markets' internationalisation.

  1. Shenzhen's unique stock sectors
    Several unique stock sectors are available in Shenzhen stock exchange including:
    Healthcare: Opportunity is seen as the need for medical services is booming with China's rising living standards, government's healthcare reforms and the aging population.
    High-tech concept: More choices are available in Shenzhen stock market comparing to Hong Kong stock market.
    Entertainment: The growth of mobile payment may trigger higher consumption towards online entertainment in China.

  2. Managing risks through diversification
    New listings from different sectors bring more options to investors and allow more diversification of asset allocation. This may avoid portfolio depreciation brought by a single industry's decline.

  3. Capture the opportunities through China stock markets' internationalisation
    SZSC shows the China government's determination to connect China market with the world. More actions of economic reform are expected in the future, which may favor the China stock market in long run.

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The 4 stock sectors may worth to consider in SZSC

With the launch of SZSC, some stock sectors may worth to consider, including the brokerage firm stocks, consumer discretionary stocks, information technology stocks and high-tech industry stocks.

  1. Brokerage firm stocks
    The approval of SZSC has once supported the performance of brokerage firms. A potential higher market turnover after the official launch is also anticipated by investors. To identify the right investment opportunity, investors may also keep an eye on the fund flows between the two markets and corporate fundamentals of individual stocks.

  2. Consumer discretionary stocks
    - Referencing SHSC, consumer discretionary (Non-necessity) stocks are more normally popular to Hong Kong's investors. Investors could also pay attention to the sectors with relatively low stock price.
    - Valuations of some companies in this sector like electronic devices' are relatively attractive (with P/E lower than 15) and may be even lower comparing to Hong Kong's similar stocks.

  3. Information technology stocks
    China's mobile internet user penetration surpasses 50%. Smartphones and 4G network users are expected to grow continuously, information technology and related sectors are expected to be benefited.
    (Information source: CNNIC "38th Statistical Report on Internet Development in China")

  4. High-tech industry stocks
    With the debut of "Made in China 2025" strategy, the Mainland Chinese Government is revamping the manufacturing sector. High-tech industry (including biotechnology, virtual reality and robotics sector) may become the focus in the big leap in the strategy.

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How Shenzhen Stock Connect may affect your A and H shares

Even though you may not be investing directly through Shenzhen Stock Connect (SZSC), your stocks could still be affected by the launch of the service.

  1. China's stock trading volume is 10 times that of Hong Kong (RMB 600-700 billion per day, compared to HKD 60-70 billion). With the launch of the SZSC service, it is expected that a lot of cash from China may head South and may affect the Hong Kong stock market.

  2. The Hong Kong stock market is currently at a historically low P/E of around 12X. This is much lower than the US and China stock markets and makes it relatively attractive to mainland investors.

  3. The SZSC symbolises China's market connection with the world and may further improve P/E and cash flow in the long run. If you currently hold A shares, A share ETFs or other related products, you may benefit from the SZSC.

*     Information source: Bloomberg https://www.bloomberg.cn/, 28 November 2016

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Four key differences between the Shenzhen and Hong Kong stock markets

Before investing in the Shenzhen stock market, you may want to understand the following four key differences compared to Hong Kong in order to capture potential opportunities:

  1. The two markets have different holidays. Be aware of the long holidays in China because traditionally A share trading is lower before long holidays such as National Week and the Lunar New Year.

  2. There is a price limit mechanism in the China Stock Market. This mechanism will be applied to a stock should its price rise or fall by more than 10%. During this period, traders need to queue up to buy and sell their stocks and this may not ensure successful trading.

  3. Green and red have different meanings in the two markets. In China, red refers to a rise, and green to a fall in the stock price. This is the opposite in Hong Kong and is worth noting to avoid any potential loss.

  4. Day trading of stocks is unavailable in China. Unlike in Hong Kong, a stock cannot be purchased and sold within the same transaction day.

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Learn the basics of investing in the Shenzhen stock market

There are some basics, such as RMB conversion, you need to know before investing in the Shenzhen market. Before investing in A shares, it may be worth paying attention to the following points:

  1. Shenzhen A shares can only be traded in RMB.

  2. Get both an investment and an RMB account in place to trade Shenzhen stocks.

  3. HSBC's one-stop trading platform allows you to invest in both Hong Kong and China markets easily and conveniently.

  4. After selling, cashing out is in RMB*. Investors may exchange their RMB back to HKD or retain it for future trading.

* The value of your RMB will subject to exchange rate fluctuations

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Unique sectors in the Shenzhen stock market

There are a number of unique sectors in Shenzhen including healthcare, entertainment and high-tech industries that may offer investment opportunities.

  1. Healthcare: Due to China's rapidly aging population and the Government's healthcare reforms in recent years, the healthcare sector has outperformed the CSI300 by 5% over the past year*. The Pharmaceutical sector has also benefited from Government policy and the changes in the population.

  2. Entertainment (including film production and online broadcasting): The rapid growth of the film industry has created a massive new market in recent years with record-breaking box office numbers. Following the massive increase in mobile internet use, the online TV, video production and online broadcasting sectors may look appealing to global investors.

  3. High-tech and related sectors: Shenzhen is now one of the largest 3Cs (computer, communications and consumer electronics) manufacturing centre in the world†. The stock trading link will unlock access to many of these Chinese technology stocks.

*      Information source: http://stock.jrj.com.cn, 16 November 2015 to 16 November 2016
      Information source: "The world's new silicon valley built by Shenzhen & Hong Kong", Hong Kong University of Science and Technology Automation Technology Center, 6 January 2014

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Measuring the premiums of A and H shares

The premiums for A and H shares will be one of the influencing factors after the SZSC launches.

  1. Some mainland companies are listed in both the China and Hong Kong markets (A shares refer to mainland stocks and H shares refer to Hong Kong stocks). Under the influence of the appreciation of the RMB in the past and the low trading volume of A shares, A shares usually have a premium over H shares.

  2. No matter whether they are holding A or H shares, the shareholders of the same company have the same voting rights. Thus the difference between the premiums of A and H shares may narrow in the long term.

  3. The difference between the premiums of A and H shares may not narrow immediately after the launch of the SZSC. Investors can consider looking into the AH premium of companies with promising growth, or with financial stability as a criteria in addition to the fundamental factors when considering an investment opportunity.

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Opportunities resulting from disclosure of ownership

Understanding the inter-related influences between Hong Kong and China could assist you in capturing the opportunities. Disclosure of ownership in the China market is one important factor.

  1. Disclosure of ownership refers to the announcement made when an investor holds 5% or more of a specific stock. This year (from January to 21 October 2016), over 50 A-share companies are owned by a single mainland investor such as a mainland insurance company or an investment firm with shareholdings of 5% or more.

  2. This year (from January to 21 October 2016), disclosure of ownership is no longer limited to high-yield stocks and has been extended to ones in which the major percentages of shares are not in the controlling shareholders' hands such as stocks of property, retail and consumer goods. Growth potential may be seen for those stocks in which ownership has been disclosed.
  3. For dual-listed shares, disclosure of ownership may now be in Hong Kong. Investors should note those potential shares that have a lower valuation or with a more dispersed ownership to capture potential growth.

*      Information source: Zhengquan ribao, "The coveted A share market brings listed companies the issue of disclosing ownership", 21 October 2016

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Important Risk Warning

  • Some of the investment products are structured products which may involve derivatives. The investment decision is yours but you should not invest unless the intermediary who sells it to you has explained to you that the product is suitable for you having regard to your financial situation, investment experience and investment objectives.
  • Investors should not base on material alone to make investment decision.
  • Investment involves risk and past performance is not indicative of future performance. Please refer to the offering documents for further details, including fees and charges and risk factors.
  • Currency conversion risk - the value of your foreign currency and RMB deposit will be subject to the risk of exchange rate fluctuation. If you choose to convert your foreign currency and RMB deposit to other currencies at an exchange rate that is less favourable than the exchange rate in which you made your original conversion to that foreign currency and RMB, you may suffer loss in principal.
Additional risks are disclosed in the "Risk Disclosure" section. Please refer to "Risk Disclosure" section for details.

Risk Disclosure

Renminbi related products Risk Disclosure

There may be exchange rate risks if you choose to convert payments made on securities/bonds/CDs to your home currency.

RMB products may suffer significant losses in liquidating the underlying investments if such investments do not have an active secondary market and their prices have large bid/offer spreads.

In general, RMB equity products are exposed to the usual kind of default risks that might be associated with equity products denominated in other currencies.

China A Shares Risk Disclosure

Investment in China A Shares through Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect involves risks. You should carefully consider whether any investment products or services mentioned herein are appropriate for you in view of your investment experience, objectives, financial resources and relevant circumstances. The price of securities may move up or down. Losses may be incurred and profits may be made as a result of buying and selling securities.

  • Pre-Trade Checking
    You must ensure that there are sufficient available shares in your account to cover any proposed sell order under Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect. Otherwise, your sell order may be rejected.
  • Settlement
    Northbound trades will follow the A share settlement cycle of the relevant Mainland market, where settlement of shares will occur on T day free of payment, and settlement of funds will be effected on T+1 day.
  • Quota Restrictions
    As at November 2016, the Daily Quota (which limits the net value of Northbound buy trades on each trading day) is set at RMB 13 billion for each China A Share market. The Daily Quota may be revised by the PRC authorities from time to time without prior notice.
    As a result of the quota restrictions, there is no assurance that a buy order can be successfully placed through Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect.
  • Restriction on Day Trading
    If you buy shares on T day, you may be able to sell only on or after settlement of the buy trade has been completed (normally on T+1 day).
  • Disclosure of Interests
    If you hold or control 5% or more* of the issued shares of a PRC listed company, you must disclose such interest.
    If there is any change in your shareholding of 5% or more*, or if a change results in your shareholding falling below 5%, you also have disclosure obligations.
  • Short Swing Profit Rule
    If you own 5% or more* of the issued shares of a PRC listed company, you must return to the company any profit made from a sale of shares within six months of the purchase thereof (or vice versa).
  • Foreign Ownership Limits
    A single foreign investor's shareholding in a PRC listed company must not exceed 10%. The aggregate of all foreign investors' shareholding in a PRC listed company must not exceed 30%. The foreign ownership limits may have an adverse effect on the liquidity and performance of an investment in China A Shares. As a result, you may suffer losses through your trading or investment in China A Shares.

* Calculated on an aggregate basis, i.e., across both domestically and overseas issued shares of the PRC listed company, whether the relevant holdings are through Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect, QFII/RQFII regime or other investment channels.

This document does not set out all the key risks to Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect. For further information, you should refer to the risk disclosures and other terms set out in (i) China A Shares - Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect Product Fact Sheet and (ii) the China Connect / Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect Terms and Conditions.

The information contained in this material has not been reviewed by the Securities and Futures Commission of Hong Kong or any regulatory authority in Hong Kong.

Investment involves risk. The price of the investment products may move up or down. Losses may be incurred as well as profits made as a result of buying and selling investment products.

You should carefully consider whether any investment products or services mentioned herein are appropriate for you in view of your investment experience, objectives, financial resources and circumstances.

Making available to you any advertisements, marketing or promotional materials, market information or other information relating to a product or service shall not, by itself, constitute solicitation of the sale or recommendation of any product or service. If you wish to receive solicitation or recommendation from us, please contact us and, where relevant, go through our suitability assessment before transacting.