SINGAPORE - Regulators in China may unveil the Shenzhen-Hong Kong stock connect some time this quarter, in a move that will further enlarge the investment flows from the mainland into Hong Kong's small and mid-sized listed companies.
This is according to a recent report published by UBS, which added that the gradual opening-up of China's capital market may lead to more mergers and acquisitions.
A stock connect platform between the Shenzhen Stock Exchange and its Hong Kong counterpart will be a logical next step for the regulators, following the rollout of Shanghai-Hong Kong link in November last year.
"At the National People's Congress in (March 2015), Premier Li Keqiang publicly discussed the possibility of a similar Shenzhen-Hong Kong scheme in the second half of 2015," said UBS. "Our base case assumption is that Chinese and Hong Kong securities regulators will jointly announce it before the end of the second quarter, and that the programme will officially commence operations some time between the end of the third quarter and the middle of the fourth quarter."
The Swiss investment bank noted that a link-up with the Shenzhen bourse - China's second biggest after Shanghai - will give global investors more access to China's domestic capital market and speed up the inclusion of China-listed shares into global benchmarks.
Another positive outcome is the increase in investment demand for small and medium enterprises in Hong Kong.
"Given onshore Chinese investors' clear preference for such stocks and the cheap valuations of Hong Kong-listed names relative to their mainland peers, we believe the Hong Kong-listed small and mid-caps will be the main beneficiaries of the programme," said UBS.
Some of its high growth picks in this segment include Anta Sports, China Power International, Greentown China, Huaneng Renewables, Luye Pharma and Sinotrans.
Under the current Shanghai-Hong Kong stock connect, Chinese investors can only trade the constituents of the Hang Seng Large and MidCap indices. This excludes around 1,500 mid-and small-cap stocks that are now listed on Hong Kong's main and growth enterprise market boards.
Requirements under the current programme also limit daily trading to 13 billion yuan for Shanghai-bound investment, and 10.5 billion yuan for Hong Kong-bound investment. These quotas may also be expanded as part of the regulators' upcoming moves, UBS believes.
In the longer term, the gradual integration of Hong Kong and mainland bourses will lead to more cross border M&A.
"Hong Kong-listed companies could be attractive targets due to their cheaper valuations relative to mainland-listed companies, and as entry point for Chinese companies seeking to venture out into overseas markets," UBS said.