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What Does The Shanghai-Hong Kong Stock Connect Mean For Singapore Exchange?

Local stock exchange operator Singapore Exchange Limited (SGX: S68) has been having trouble growing its business for a number of years now. Since seeing annual revenue peak at S$769 million in the year ended 30 June 2008 (FY2008), sales have struggled to break the S$700 million mark and has since steadily slipped to S$672 million for the last 12 months.

As if that hasn’t been a bad enough headache for investors, another event is happening at the moment which could pile on the worries for SGX’s investors.

The Shanghai-Hong Kong Stock Connect will be launched next week. For many years, retail investors from outside China have not been able to access mainland China’s stock market directly due to regulatory restrictions. The shares traded on the Shanghai or Shenzhen Stock Exchanges, known as “A-shares,” are only open to domestic investors and some qualified foreign investors. This is in contrast to the stock exchange in Hong Kong where there are no such restrictions.

The company behind the stock exchange in the territory is Hong Kong Exchanges and Clearing Limited (HKEx). While SGX’s current market capitalisation of S$7.7 billion might seem big by Singapore’s standards, the HKEx is five times bigger by market value. And in terms of market activity, the HKEx also trumps the SGX. In 2013, only 26 IPOs had made their debuts in Singapore’s market – in Hong Kong, US$21 billion was raised in that year through 112 IPOs. That volume of activity was in fact second only to the New York Stock Exchange.

Because of the aforementioned regulations concerning foreign investors, companies which are dual-listed in both Hong Kong and China have seen huge disparities in the price of their shares listed in Hong Kong as compared to the ones listed in China – and this has gone on for many years. With the new Stock Connect initiative, anyone with access to the HKEx will be able to buy A-shares directly. This opens up a huge new avenue for retail investors’ investable funds.

Once the Shanghai-Hong Kong Stock Connect initiative is up and running, retail investors who want direct exposure to Chinese companies would have the following choices:

  1. H-shares in Hong Kong (shares of China-based companies listed in Hong Kong)
  2. A-shares in Shanghai
  3. ADRs (American depository receipts) in various American stock market exchanges
  4. S-Chips in Singapore

Given the poor reputation of S-chips, it seems likely that there would be even less attention being paid to this class of shares from investors interested in Chinese companies.

In today’s world, where an investor can easily and conveniently access stock markets from around the world at the click of a mouse, companies running stock exchanges are actually competing for the attention of investors and companies in a globalized market place.

Till date, SGX’s efforts to bring in other foreign shares – through its own ADR and Global Depository Receipt programmes – have not been very successful. Maintaining its relevancy in the global exchange-battlefield will thus be a real challenge for Singapore Exchange and it would likely need to carve out a niche for itself in order to do so. Failing which, the company might just end up as a predominantly local bourse with limited growth potential.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.