New Chinese substitution – Newspaper Kommersant No. 189 (7390) of 10/12/2022

SPB Exchange significantly expands the list of shares of companies traded on the Hong Kong Stock Exchange (HKEX). This will diversify investments of unqualified investors. However, the liquidity of the securities is low and is concentrated primarily in depository receipts traded in the US. To launch the institution of market makers, it will take time to build the infrastructure, market participants note.

Starting October 12, SPB Exchange expands the list of shares of Hong Kong companies available for trading to 60 items. Issuers such as Baidu, Lenovo Group, Li Auto, Geely Automobile and others have been added to the currently traded securities of Alibaba Group, Tencent, Xiaomi, Sinopec, PetroChina. Some of the securities (Baidu, NetEase, Li Auto, Bilibili, JD.com, Alibaba Group) will be traded as HKEX-listed shares and US-listed depositary receipts.

So far, interest in the shares of Hong Kong companies remains proportional to their share in the list of securities, that is, not too large. In particular, the trading volume with them in September amounted to HK$0.39 billion (about $50 million), which is less than 1% of the total volume (see “Kommersant” dated October 6). With an increase in the number of shares, the share will exceed 3%.

Nevertheless, Russian investors prefer to deal with depositary receipts rather than shares of Hong Kong companies. In particular, only receipts from Alibaba Group were among the ten most liquid securities on the SPB Exchange this year, and in the SPB100 index, which is characterized on the exchange as an “average portfolio of private investors”, in addition to them, depository receipts of JD.com, Baidu and LiAuto.

At the same time, SPB Exchange expects a flow of trading activity in securities of Chinese issuers from the US market to the Hong Kong market.

The head of the analytical center of the exchange, Pavel Pakhomov, explained that this is due to both technical (risks of delisting securities in the United States, arbitrage opportunities between the two markets) and fundamental factors (geopolitical background, exit of American investors from these securities, etc.).

The expansion of the list of shares from “friendly jurisdiction” available to investors on the SPB Exchange is positive news, market participants believe. According to Finam’s investment consultant Marat Raichel, the restrictions imposed by the Central Bank on the purchase of foreign securities from unfriendly countries have cut off unqualified investors from the US market.

In such conditions, the purchase of Hong Kong shares will allow diversifying the country risk of the portfolio, he believes. Investors have the opportunity to diversify by sectors of the economy through such industries as communication services (NetEase, Baidu), the production of electric vehicles (Li Auto, NIO, XPeng) and others, Mr. Reichel notes.

In addition, there are currently no problems in the Russian market with the conversion of various currencies into the Hong Kong dollar. As the head of the department of the Internet broker in the international markets “BCS World of Investments” Alexander Zuckerman explains, the Hong Kong dollar is a “friendly” foreign currency, and there is no “penalty” for the purchase and storage. With the expansion of the list of Hong Kong shares available for trading, the turnover of the Hong Kong dollar on the Moscow Exchange will also grow, the expert believes.

However, so far the market situation is not in favor of Chinese securities. Oleg Syrovatkin, Leading Analyst of the Global Research Department at Otkritie Investments, notes that since the beginning of the year, Hang Seng (the Hong Kong Stock Exchange index) has decreased by 39%, while the Stoxx Europe 600 index has fallen by 33%, and the S&P 500 has fallen by only 24%. “The weaker performance of the Hong Kong stock market is largely due to the zero tolerance policy for COVID-19, which limits economic activity in China,” the expert explains.

Freedom Finance Global analyst Roman Lukyanchikov adds that the Chinese market remains unstable and the current measures to support the Chinese economy by the authorities are insufficient to accelerate economic growth, so a market turn before the middle of the fourth quarter is unlikely.

A market maker program could intensify trading in Hong Kong shares, but so far SPB Exchange has concluded such agreements with brokers only for securities listed in the US, Germany and the UK.

The exchange did not respond to Kommersant’s request.

The BCS GC notes that for the effective operation of this institution, a number of conditions must be met. In particular, the ability to use liquidity from other sites. To do this, the group explains, it is necessary to create an infrastructure that would allow for “seamless access to foreign exchange platforms”, which will take time.

Ksenia Kulikova