Beijing urged to relax and expand stock connect scheme

Brokers call for small companies to be allowed on to one-year-old cross-border trading plan to draw in more of China’s retail investors

PUBLISHED : Sunday, 15 November, 2015, 11:00pm
UPDATED : Sunday, 15 November, 2015, 11:00pm

Brokers are calling for Beijing to allow more mainland retail investors to trade through the one-year-old stock connect scheme between Hong Kong and Shanghai, while they also want to see more small companies made available through the scheme.

They also want to see the cross-border trading scheme grow by adding the Shenzhen market to the mix as soon as possible, with a bond connection to come later.

“While the stock connect scheme could be seen as successful in its first year, there is room for improvement. The restriction that only mainland retail investors with 500,000 yuan would be allowed to trade Hong Kong stocks via the scheme should be abolished,” said Christopher Cheung Wah-fung, the legislator representing the financial services sector.

“This restriction excludes the majority of mainland retail investors which explains why trade from them to Hong Kong is lower than international investors trading Shanghai stocks under the scheme,” Cheung said.

The scheme has no criteria on international investors so they can easily trade in Shanghai.

The Shanghai-Hong Kong Stock Connect, also known as the stock through train scheme, will mark its first anniversary on November 17. In that time, about two trillion yuan worth of stocks have been traded across the scheme.

The plan, which for the first time allowed international investors to directly trade Shanghai stocks while mainlanders could buy Hong Kong stocks subject to a quota, was a milestone for Beijing.

Cheung said it would be good to see the quota lifted or abolished. “But this is not a priority as the quota has seldom been used up during the past year,” he said.

Mainlanders can trade 10.5 billion yuan worth of Hong Kong stocks a day, or 250 billion yuan in total, while international investors can trade 13 billion yuan of Shanghai shares a day, or 300 billion yuan in total. So far, the full daily quota has only been exhausted on three days.

As of November 10, about 42 per cent, or 125 billion yuan, of the northbound aggregate quota (international investors buying Shanghai stocks) was used while about 36 per cent, or 91 billion yuan, of the southbound aggregate quota (mainlanders buying Hong Kong stocks) was used. This is partly because the quota is calculated on a net basis so when buy and sell orders balance, very little quota is used.

Cheung said what was more important was to allow more smaller companies into the scheme as retail investors like to trade such stocks. “We would also like to see the launch of the Shenzhen and Hong Kong stock connect in the first quarter next year to include smaller companies.”

At present, about 200 companies in Hong Kong and 400 Shanghai companies take part in the scheme. This compares with more than 1,700 companies listed in Hong Kong and about 1,100 companies listed in Shanghai.

Shanghai-based Gerry Alfonso, director of Shenwan Hongyuan Securities, said mainland markets are dominated by retail investors who need time to become familiar with Hong Kong’s market.

“Retail investors tend to be more local and only buy stocks of companies that they know better. Over time, mainland investors will become more familiar with the Hong Kong market,” Alfonso said.

He said the connect scheme has been a success and is looking forward to its expansion when Shenzhen joins.

“The future opening of the Shenzhen-Hong Kong Stock Connect will be the next major step and it is clear movement towards a higher integration between the mainland and Hong Kong markets. It won’t happen overnight but both pilots will be a success,” Alfonso said.

The Shenzhen connection had been expected to start at the end of this year but was postponed as a result of the mainland market rout in the third quarter.

Cheung believes that after the recent resumption of initial public offerings announced by Beijing, that the next cross-border trading scheme should be launched soon.

Ben Kwong Man-bun, the executive director and head of research at KGI Asia, said Beijing should establish more stock connections as well as considering a link up between Shanghai and London, or even between the Hong Kong and mainland bond markets.

“The stock connect between Hong Kong and Shanghai has proven to be a successful model for China as it gradually opens up its capital market. More cross-border trading schemes would help China connect to the international market,” Kwong said.

“This is not just a money-making scheme for investors. It is an important scheme to make the yuan an international currency and to allow the mainland stock and bond markets to be part of the world at large,” Kwong said.