05:28 - 12/11/14
Investors are seen gathering at a securities exchange in Shanghai, on August 22, 2012
© AFP/File Peter Parks
Shanghai (AFP) - When the Shanghai and Hong Kong stock exchanges "connect" on Monday it will open multi-billion-dollar channels for investors to play both markets, but some Chinese punters say it looks more like a bad trade.
Overseas investment houses are salivating at the prospect of greater access to the Shanghai bourse, and the companies of the world's second-largest economy.
But most of China's more than 175 million stock investors are individuals, accounting for an estimated 80 percent of trading on the Shanghai Stock Exchange, once described as a "casino" by Chinese economist Wu Jinglian because of its speculative gyrations.
The new "Shanghai-Hong Kong Stock Connect" scheme will allow investors on each exchange to trade selected stocks on the other through their existing accounts, with expected cross-border trades of up to $3.8 billion daily.
The bourse in Hong Kong -- regarded as the world's freest economy -- is already open to global investors so the scheme further opens Shanghai's largely closed market to the outside world.
But in the other direction, a high capital requirement and a selected number of just over 260 shares is discouraging China's army of retail investors.
At the same time China's leaders maintain strict capital controls to keep a tight grip on the yuan currency, and the scheme has been designed to ensure it cannot be used to move money permanently out of the mainland.
For Chinese investors the minimum capital required to participate is $82,000, putting off Lei Xianrong of Shanghai, who sells automation products and trades stocks on the side.
"The Shanghai-Hong Kong link doesn't mean much to retail investors. None of my friends want to go through with it," Lei said.
And hairdresser Wang Youfu was also hesitant. "We don't understand how the Hong Kong market works. The government just wants Hong Kong investors to put their money here," he said.
Chinese analysts and state media are more upbeat, some describing the programme as an "unprecedented" reform, but institutional investors in Hong Kong are viewed as the main beneficiaries.
"The scheme shows strong political willingness on the part of China's government to further open up the country's capital markets to outside investors," said China economist for Barclays Capital, Chang Jian.
A similar idea, the stock "Through Train", was floated in 2007 but derailed because of the global financial crisis.
- Northbound train -
But China may have another motive: tighter ties with the former British colony that returned to Chinese sovereignty in 1997, and where street protests have been demanding greater democracy for weeks.
The scheme had been expected to start last month, but was delayed until the launch date was announced Monday.
"Cross-border yuan flows between the two sides will definitely become more and more frequent, so economic and trade relations between both sides will be much closer," BOC International analyst Shen Jun said.
Beijing is moving gradually to make the yuan more freely convertible in line with China's financial might, but the stock linkage will still have limits on currency flows.
China has granted an initial cumulative quota of 250 billion yuan ($41 billion) for trading of Hong Kong stocks, while 300 billion yuan will be allowed for the Shanghai market, with daily allowances of 10.5 and 13 billion yuan respectively.
Analysts also stressed that if a mainland investor buys stocks in Hong Kong, when they sell the money can only go back to their account on the mainland, a so-called "closed path" to prevent "hot money" leaking out.
"Renminbi flows will be limited to between the two stock markets. This is easier to control," Industrial Bank foreign exchange analyst Jiang Shu said, referring to the yuan.
Analysts expect stronger investor interest from Hong Kong in China's domestic shares, known as northbound trading.
Hand-picked foreign institutions can already access China's capital markets but through a strict quota system, with little more than $110 billion approved so far.
In the new scheme, Hong Kong investors can pick from more than 560 Shanghai-listed companies, only 67 of them already dual-listed. Some firms are from sectors scarce in Hong Kong, such as traditional Chinese medicine maker Beijing Tongrentang and Jiangxi Hongdu Aviation Industry.
"There's definitely greater interest in northbound trading than southbound," said Chen Li, Shanghai-based strategist for UBS Securities.
Enthusiasm for the expected launch has driven the benchmark Shanghai Composite Index to a three-year high this week.
But in the longer term it has offered unusually poor returns. The index peaked in 2007 at almost three times its current level and has been on a steady downward trend for the past five years -- it was the world's worst performer last year even while US markets hit record highs as they recover from the global financial crisis.