China stock market

Shanghai-Hong Kong stock connect disappoints in 2015, regulatory changes needed to ensure their success

Brokers want to see Shenzhen, bond and commodities connect to kick off

PUBLISHED : Sunday, 03 January, 2016, 10:01am
UPDATED : Sunday, 03 January, 2016, 10:01am

The Shanghai and Hong Kong stock connect failed to live up to market expectations, but the appetite of the stock exchange and brokers for more connect schemes in 2016 has not been sated although they are seeking a lineup of regulatory changes to make these cross border schemes a success.

Top of their the wish list is the Hong Kong and Shenzhen stock connect, which initially was expected to be launched by the end of last year but was delayed without a launch date after the summer rout in mainland China’s equity markets.

“Shenzhen has many more small and medium sized A-shares which are favoured by the retail investors. The launch of the Hong Kong and Shenzhen stock connect will definitely help boost market sentiment,” said Christopher Cheung Wah-fung, lawmaker of the financial services sector who is also a stock broker.

He also called for removal of the quota and the restriction that mainlanders need to have at least 500,000 yuan in their securities account before they are qualified to trade the connect scheme.

“These restriction have discouraged investors to trade the connect scheme and that was why cross border trading has low turnover,” he said.

The Shanghai and Hong Kong stock connect completed its first year in 2015 and HK$2.534 trillion worth of shares traded under the scheme. This includes northbound trade with international investors dealing a total of 1.471 trillion yuan (HK$1.756 trillion) worth of Shanghai-listed A-shares in 2015 via Hong Kong brokers, while the southbound trade with mainlanders hit a total of HK$777.73 billion worth of Hong Kong stocks.

The average daily turnover under the connect scheme represent about 1 per cent of trades in the entire market while only 40 per cent of the quota of 300 billion yuan in northbound and 250 billion yuan in southbound was used.

The stock connect scheme also failed to close the price gap between H-shares listed in Hong Kong and A-shares listed in Shanghai. The Hang Seng China AH Premium Index, which tracks the price difference between dually listed companies across the border, closed at 139.75 at the end of 2015, the highest since the index was launched in 2008.

This means A-shares listed in Shanghai and Shenzhen on average are trading at a premium of 39.75 per cent when compared with their H-shares counterpart in Hong Kong.

Ben Kwong Man-bun, executive director of KGI Asia, said this is due mainly to regulatory differences in the two markets.

“It is very difficult to do arbitrage between Shanghai and Hong Kong. The stock exchange of Hong Kong allows short selling and has no price limit, while China bans short selling and suspends companies to trade for the day when they rise or fall by 10 per cent. This has led many investors who are short to sell or dispose of their H-shares. The price gap would be hard to be narrow down, particularly in a bear market,” Kwong said.

Terence Ho, EY’s greater China strategic growth market leader, said the daily quota should be removed.

“This has proven to be unnecessary, but it posts a potential risk to investors in theory, which is being extrapolated. If this mental hurdle is gone, people will be more willing to trade cross border,” Lo said.

Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia said last month the bourse is considering to link up with the London Metal Exchange for a commodities connect, which later could also connect with China’s commodity markets. No further details were given.

The London Stock Exchange is planning a study with the Shanghai Stock Exchange for a link.

Bruno Lee Kam-wing, Asia head of wealth and asset management at Manulife, said a bond connect between Hong Kong and China would be a good idea as international investors now could find it hard to access the mainland bond market.

Kenneth Leung Kai-cheong, said all these connect schemes with different products and markets would be ideal to link the Chinese markets to the world.

“These linkages would encourage cross border trading. The key issue is for the regulators to make sure these connect schemes would not be used as a way for money laundering or illegal capital outflows from China,” Leung said.

Timothy Lo, the managing director of French private bank CIC Investor Services, said for the stock connect to be successful, it would require mainland China to improve the operational mechanism to boost the confidence of investors.

“Bear in mind, some 70 per cent of investors in China are retail investors with only 30 per cent institutional investors. So once the mass market is quiet, there is not much we can do but only wait until the sentiment gets better.”

Hong Kong Investment Fund Association chief executive Sally Wong hopes to see more changes in the connect scheme to make it easier for international fund houses to trade. This includes adding the linkage with Shenzhen and allow more A-shares to be traded in the scheme. She also wants see Beijing clarity the beneficial ownership of shares and remove the quota.

“It will be helpful if there is an automatic mechanism to raise the quota. If there is sufficient demand. This will discourage ‘hoarding’ of quotas and permit investors to trade based on true demand,” she said.