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The Connect Hall at Hong Kong Exchanges and and Clearing in Central in Hong Kong. Photo: SCMP / Jonathan Wong

Hong Kong’s connect schemes with mainland China markets earn praise, calls for more innovation from investment experts

  • Investment experts call for additional connect linkages to let international investors access mainland Chinese assets such as equity derivatives
  • The suite of connect schemes enhances Hong Kong’s financial hub role and the long-term prospects of the mainland capital market

Hong Kong and China should celebrate and extend the suite of connect schemes that give overseas investors access to mainland Chinese financial assets, as the mechanisms enhance both Hong Kong’s role as a finance hub and the long-term growth prospects of the world’s second-largest capital market, according to international investment experts.

“Further innovation in the future, such as enabling access to equity derivatives and other hedging tools via a connect mechanism, would be a further welcome addition to the opening up of mainland Chinese financial instruments to overseas investors,” said Kevin Anderson, head of investments of Asia-Pacific of Boston-based State Street Global Advisors.

Managing US$4.14 trillion worth of assets, the world’s fourth-largest asset manager now trades China A shares almost exclusively through Stock Connect.

“Stock Connect provides an extremely liquid route to access mainland listed equity, while Bond Connect is also enabling us to access liquidity for our clients,” Anderson said. “We are encouraged that more types of onshore bonds are under evaluation for inclusion in the Bond Connect scheme.”

people walk in front of the large screen showing the latest stock exchange data in Shanghai on August 22, 2022. Photo: EPA-EFE
Hong Kong first launched the Stock Connect scheme in November 2014, offering a major conduit for global funds to access China’s onshore yuan-denominated A shares, which had been hitherto off-limits due to China’s capital control.

Since then, more linkages have been built.

The first Bond Connect was established in July 2017 for global traders to buy China’s onshore bonds through Hong Kong. The southbound Bond Connect, enabling offshore yuan-denominated debt, known as dim sum bonds, launched last year.

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A cross-border Wealth Management Connect scheme launched in September 2021, allows Hong Kong banks, including HSBC, Standard Chartered and Bank of China (Hong Kong), to sell Hong Kong investment fund products to the residents of Greater Bay Area cities through their mainland banking partners.

“The Wealth Management Connect scheme enables not just institutional investors, but also individual investors in the Greater Bay Area to directly invest in offshore wealth-management products without having to travel across borders,” said Sebastian Paredes, CEO of DBS Hong Kong. “We see this as a major breakthrough as it deepens the connectivity of the mainland and Hong Kong financial markets in the area of wealth management.”

In June this year, the China Securities Regulatory Commission (CSRC) and Hong Kong’s Securities and Futures Commission (SFC) earlier agreed to add exchange-traded funds (ETFs) to the Stock Connect scheme. The addition started on July 4, a move that was seen as a gift marking the 25th anniversary of the city’s handover.

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“[Our clients make use of the connect schemes] extensively, especially the Stock Connect and Bond Connect schemes, which have become the preferred access channels to China for a majority of asset-management clients,” said Effie Vasilopoulos, co-leader of the global investment funds group at Sidley Austin. The firm’s clients prefer the schemes as they are the “cost effective and simple access route to the China market”.

A more innovative connect mechanism would play an important role in helping Hong Kong maintain its financial hub role.

“These schemes have also fuelled greater confidence in the Hong Kong capital market because of the widespread belief that China will continue to support the use of these schemes as an effective liquidity tool to develop the investment ecosystem,” said Vasilopouslos, who focuses on international investment fund formation transactions.

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“This mechanism and the recent tax incentives that have been introduced for the asset management sector are acting as a strong draw for asset managers and the ecosystem that supports the sector.”

Major fund house Fidelity International said that the connect schemes have continued to give investors “access to new asset classes” since their establishment.

“With the integration of Hong Kong into the Greater Bay Area as a strategic long-term development direction, more connectivity can be expected across channels such as financial markets and talent pools,” said Andrew McCaffery, global chief investment officer of asset management at Fidelity.