Hong Kong-Shanghai Trade Link Disappoints on Day Two

Investors largely ignored the link-up between the Hong Kong and Shanghai stock exchanges Tuesday, a day after it launched to much fanfare and hopes of billions of dollars in daily cross-border transactions.

Officials have trumpeted the Shanghai-Hong Kong Stock Connect as opening up China's closeted stock markets to the outside world and giving mainlanders a chance to enter the lucrative Hong Kong exchange.

But the second day of trading proved a damp squib, with China-based investors buying 7.6 percent of their daily allowance of Hong Kong shares, while Hong Kong dealers picked up less than a third of their Shanghai quota.

The launch day was also disappointing. While Hong Kong investors had exhausted their daily allowance of Shanghai shares two hours before the end of trade, mainlanders used up less than 20 percent of their quota by the close.

The weak uptake was reflected in the two stock markets, which were hit by another batch of downbeat housing data out of China that indicates continued weakness in the world's number two economy. Hong Kong ended 1.13 percent lower, while Shanghai lost 0.71 percent.

"One would expect trading volumes to be the highest at the beginning and have daily trading limits hit extensively," Credit Suisse said, according to Dow Jones Newswires. "While we do expect participants to increase materially over time, southbound volumes were disappointing."

Shares in Hong Kong Exchanges & Clearing fell 2.36 percent Tuesday after losing 4.45 percent Monday.

Sun Jianbo, Beijing-based chief strategist of China Galaxy Securities, said he was not surprised by the weak uptake from mainland traders.

"Those who were interested in the Hong Kong market placed their money there long ago through other channels," he told Agence France Presse.

"There’s no need for them to retrieve their money and reinvest through the Shanghai-Hong Kong Stock Connect. As for those who can’t afford to invest in the Hong Kong market, they don’t know much about the market anyway."

He said the link "will enhance Hong Kong’s status as a window for international capital to enter China, it’s not playing any significant role in channeling Chinese funds out".

The creation of the trading platform is seen as a key step towards greater liberalization in the world's second largest economy.

But it is subject to strict limits in order to preserve capital controls in China, where Communist authorities keep a tight grip on the yuan currency.

If an investor buys stocks in the other market, when they sell, the money can only return to their home market account -- a so-called "closed path" to prevent "hot money" leaking out.

However, while Hong Kong dealers are keen to buy up firms in China, many mainland traders -- who are usually elderly private investors -- are reluctant to go the other way and enter a market with which they are not familiar.