Stock Connect

Changes announced by China central bank chief to benefit investors

Measures by Yi Gang are aimed at reforming the mainland financial system to encourage both foreign and domestic investment

PUBLISHED : Tuesday, 17 April, 2018, 1:26am
UPDATED : Tuesday, 17 April, 2018, 1:26am

For average investors on both sides of the border, the latest announcement on the stock connect schemes by China’s new central bank chief can only be welcome news. Speaking at the Boao Forum for Asia, Yi Gang revealed a plan to quadruple the daily quota on the Hong Kong-Shanghai and Hong Kong-Shenzhen stock connect schemes from May 1. This means the daily southbound quota will be increased to 42 billion yuan (HK$53 billion) from 10.5 billion yuan and the northbound quota will be raised to 52 billion yuan from 13 billion yuan.

Another scheme is afoot to establish a trading link with London by the end of the year. For mainland investors who have long complained about the dearth of quality stocks available, the latest measures will provide greater and better scope for investment and diversification. They are part of the reform of the mainland financial system to encourage both foreign and domestic investment. One aim is to persuade Chinese technology giants to list domestically, and to make the stock connect schemes more attractive.

Hong Kong stocks end higher after daily quotas quadrupled for Stock Connect links

Mainland retail investors have long had a sense there are few quality mainland shares and that all top firms have chosen to list overseas, usually in Hong Kong or the United States. This has made for volatile trading. When retail investors make money they are happy, but when they lose they tend to blame the government, often with vocal protests.

Chart of the day: Symbolic move in China’s stock quota increase

For social harmony and the health of the financial system, officials have a strong incentive to encourage such established firms to come home for listing. Given the high levels of household savings, mainland investors are highly liquid; and foreign investors are also eager to take advantage of the promised opening. So there is huge potential for the companies to raise capital domestically and, if they do, they would probably be allowed to retain their dual share structure to maintain their overseas listings as well as management control.

Why more foreign institutions are buying Chinese stocks

In trying to tighten financial risks, Beijing is right to promote quality listings at home. Among these are the well-known tech brands, whose presence in the stock connect scheme will prove to be a significant boost. But, at the same time, mainland authorities need to strengthen regulations. Since the recent market turbulence, it’s clear to top policymakers that loose regulations and loopholes must be plugged so companies do not manipulate the market so easily. Part of this realisation has been a determined effort to crack down on so-called big crocodiles, financial players with enough resources and connections to play the system. There has also been an overhaul of regulatory bodies for insurance and the stock market.

Transparency and fairness through improved regulations are key to providing a proper environment for investors. They deserve no less.