'Through train' linking the Hong Kong and Shanghai stock markets will pick up steam once reforms are made

PUBLISHED : Wednesday, 18 November, 2015, 6:15am
UPDATED : Wednesday, 18 November, 2015, 6:14am

When the stock connect scheme linking share trading between Hong Kong and Shanghai was launched a year ago yesterday, it was hailed as just as important as the listing of H-shares two decades before. That remains to be seen.

Reforms are needed to inject more volume and value into thin turnover in cross-border share trades if the potential of the scheme is to be realised in the foreseeable future. But turnover is not everything, as stock exchange chief executive Charles Li Xiaojia has pointed out.

He said the focus should not be on statistics because the stock connect scheme was a catalyst, and a model that showed the benefits to Hong Kong of working alongside the mainland as it grew and internationalised.

The scheme was launched ahead of a slowdown in the mainland's economic growth and market turbulence. As a result, northbound turnover - investors buying Shanghai stocks through Hong Kong - peaked at only 2 per cent of the Shanghai market in April, before slipping to 0.6 per cent now.

Southbound turnover peaked at 5 per cent of the Hong Kong market, and is now about 1 per cent. Nonetheless, the "through train" survived the July stock market crash on the mainland, and the experience could help show the way forward, with a Hong Kong-Shenzhen trading link expected to be launched next year.

Only one in four local brokers has invested in a cross-border trading platform. One explanation is the lack of motivation for brokers to promote cross-border products to their own clients when they have limited knowledge of them. To overcome this, regulators should consult on giving local brokers expanded access to mainland investors and vice-versa.

When the Shanghai link was launched, the Hong Kong Monetary Authority scrapped this city's daily 20,000 yuan conversion limit. This is evidence of Hong Kong's relevance to reform of the mainland's capital markets - the centrepiece of internationalisation of its economy - and underlines the city's potential as a financial centre under Beijing's "One Belt, One Road" trade-route strategy.