China announces Shenzhen-Hong Kong stock market link. (Photo : Getty Images)
China is now the most sought-after stocks exchange after the government announced a green light for the link between Shenzhen and Hong Kong indexes while stock prices of the "good ones" shoot up.
The Chinese government approved the link on Tuesday in order to attract more investors to its tech-heavy Shenzhen exchange, The Wall Street Journal reported.
However, many investors see some of the "good ones" in the Shenzhen stocks exchange to be much too expensive, a proof that China is now the most expensive market in the world.
The Effects of Linking Shenzhen-Hong Kong Trading
After the announcement, different stock exchange covered in the link reacted quite differently.
According to WSJ, Hong Kong's Hang Seng Index ended with a 0.5 percent drop while the Shenzhen Composite Index and the ChiNext index both shot up by about 0.3 percent each. The Shanghai Composite, on the other hand, remained relatively unchanged.
The announcement also rippled through foreign exchanges where the Nikkei Stock Average earned an extra 0.9 percent even though the yen became weaker and the Australian S&P/ASX 200 has risen 0.1 percent while the Korean Kospi decreased by 0.2 percent.
According to Guotai Junan Securities analyst Zhang Xin, such reactions were normal and should stabilize soon enough.
"The market may enter a moderate correction period since the good news has been exhausted in the short term," he explained.
Expensive Market
Even though the announcement was good news to traders, there was little positive reaction amid what the WSJ described as a "fatigue" among traders who had waited a long year for the link to come to reality.
"We expected the Shenzhen-Hong Kong Connect for a long time," Kim Eng Securities regional strategy analyst William Cheung told WSJ.
Aside from that, stocks that are considered "good" by traders are more expensive than usual, especially in the Shenzhen stocks exchange.
"The good ones [Shenzhen stocks] are very, very expensive," said BNP Paribas Investment Partners Asia Pacific equities head Arthur Kwong.
Because of this, China is being dubbed as the world's most expensive trading market as reflected by the expected higher growth rate.
Capital Economics China economist Julian Evans-Pritchard said that Shenzhen Stock Connect will have very small effects on capital flows and equity valuations.
"It is a welcome signal that policymakers are keen to press on with financial reform as concerns over market volatility and capital outflows fade. But limited appetite overseas for mainland equities means the direct impact on equity valuations and capital flows will be small," he wrote in a report cited by BBC.
