As part of China's market reforms, a stock-trading link between the southern city Shenzhen and Hong Kong was recently approved.
Now everyone is comparing prospects for the Shenzhen-Hong Kong Connect with events surrounding the start of the Shanghai-Hong Kong Connect 21 months ago. Shenzhen-Hong Kong Stock Connect will allow overseas investors to trade stocks on the tech-heavy Shenzhen exchange and offer mainland investors access to small-cap companies listed in Hong Kong.
When the Shanghai-Hong Kong Connect began in November 2014, a raging bull was brewing. In the ensuing seven months, the Shanghai market surged more than 100 percent before a dramatic crash occurred.
Analysts said the Shenzhen-Hong Kong Connect is likely to be more benign.
"Some investors see the new connect as a key signal for the start of a new bull run and an upsurge in brokerage stocks," UBS Securities said in a note. "However, we think the surge is unlikely to be repeated since current market conditions are completely different from those at the launch of the Shanghai-Hong Kong link."
Back then, UBS noted, the market was driven by the central bank's decision to cut interest rates and by heavily leveraged funds.
Since then, securities regulators have cracked down on margin financing, and banks' wealth management funds are being restricted from investing in stocks, the Swiss-based bank said.
Outstanding margin financing — money investors borrow to buy stocks — stood at below 900 billion yuan (US$135 billion) last week, compared with a peak of 2.3 trillion yuan recorded in June 2015, just before the big crash.
"I think the Shenzhen Connect program is a good news, but the extent of this good news may not prop up the share market," said Hong Hao, chief strategist at Bocom International Holdings Co.
Hong said further market advances will depend on more positive news from fundamental changes and sustainable liquidity improvement.
Although it may not be as sensational as the groundbreaking Shanghai-Hong Kong Connect, the new Shenzhen link will expand the investing universe for mainland and Hong Kong investors.
After the launch of Shenzhen link, 50 percent of stocks in A Shares, or 81 percent by market share, will be available to foreign investors through the two stock-connect programs, according to Robeco Institutional Asset Management.
The new program will give overseas investors access to 880 Shenzhen-listed stocks, including 270 on the main board, 410 on the SME board and 200 on the ChiNext board. Initially, the ChiNext board will open to institutional professionals only.
"The launch of Shenzhen Connect will offer international investors better exposure to the high-growth parts of China's economy," said Erwin Sanft, head of China strategy at Macquarie Securities Group. "Private enterprises and 'new economy' stocks make up 74 percent of eligible stocks in Shenzhen, compared with 38 percent via the Shanghai connect."
Shenzhen's market is dominated by sectors related to China's 'new economy,' including information technology, healthcare, consumer discretionary and advanced materials.
Shenzhen stocks in general posted annual profit growth of around 15 percent in the past three years, while the actual earnings growth of Shanghai stocks has slipped to negative territory in 2015, according to UBS.
