HKEX Special

Stock Connect initiatives enhance Hong Kong’s trading links with Shanghai and Shenzhen

Market integration could be expanded to cover commodities, bonds and currency, experts say

PUBLISHED : Tuesday, 27 June, 2017, 4:06pm
UPDATED : Tuesday, 27 June, 2017, 4:06pm

Two years after the launch of the much-trumpeted Shanghai-Hong Kong Stock Connect, a second connection was unveiled late last year. The Shenzhen-Hong Kong Stock Connect has combined and expanded cross-border trading links, and improved the mutual access between Hong Kong and mainland stock markets.

The protection of investors’ interests has been in place to ensure a smooth launch of the Shenzhen-Hong Kong Stock Connect programme. Similar to the arrangements for Shanghai-Hong Kong Stock Connect, the Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC) established mechanisms to safeguard the integrity of both markets under the Shenzhen-Hong Kong Stock Connect before the launch. The regulatory arrangements for Shenzhen-Hong Kong Stock Connect include an expansion of cross-boundary regulatory cooperation to ease real-time surveillance by the SFC and the CSRC of activity in their respective markets.

Meanwhile, the first six months of trading of the Shenzhen-Hong Kong Connect initiative was smooth, although the trading amount was not high, says Ringo Choi, EY’s Asia-Pacific IPO leader.

“The trading amount reflects [how] investors have become increasingly mature with long-term investment strategies,” he says. “Since the inception of the Shenzhen-Hong Kong Stock Connect on 5 December, 2016, HK$71.1 billion of northbound and HK$36 billion of southbound net buying have been recorded, compared to the Shanghai-Hong Kong Stock Connect’s respective totals of

HK$75.6 billion and HK$119.1 billion in the same period.” The northbound buying also reflects how mainland China’s small- and medium-sized companies, mostly in emerging industries, are attractive to outside investors, he adds.

Louis Lau, partner of capital markets advisory group, KPMG China, says the average daily turnover of Shenzhen-Hong Kong Connect was relatively low in the first six months of operation. “We need to bear in mind that the trading volume is but one parameter in assessing the effectiveness of the scheme,” he says. “The two cross-border Stock Connect programmes are not designed to give an instant boost to trading volume. The main goal is to promote the connectivity and long-term integration of the Hong Kong and [mainland] China capital markets.” The southbound turnover of Shanghai Connect contributed less than 1 per cent of Hong Kong’s total market turnover during its first five months before climbing to 3.4 per cent prior to the launch of Shenzhen Connect, Lau notes.

The list of eligible securities can be extended to smaller-cap companies and even companies that are undergoing a listing in order to achieve greater mutual access
Louis Lau, partner of capital markets advisory group, KPMG China

“The combined southbound turnover of the two schemes makes up approximately 5 per cent of Hong Kong’s total market turnover and is continuing to increase,” he says. “The increase signifies the integration between the two regions’ capital markets.” Approximately half of the listed companies in Shanghai and Shenzhen and one-quarter of listed companies in Hong Kong can be traded through the two Stock Connect schemes, Lau says. “They are ... medium to large-cap companies and represent over 80 per cent of the three stock exchanges’ combined market capitalisation.” he says. “The list of eligible securities can be extended to smaller-cap companies and even [those] that are undergoing a listing to achieve greater mutual access.”

The requirement for mainland individual investors to hold an aggregate balance of not less than 500,000 yuan (HK$574,00) in their securities and cash accounts is blocking some southbound trades. This rule can be removed when market stabilisation becomes less of a concern, and would expand the investor base of the Stock Connects, Lau believes.

Choi thinks the success of Shenzhen-Hong Kong Stock Connect and Shanghai-Hong Kong Stock Connect has helped enrich the trading of the three markets for further connection opportunities, such as “Bond Connect” or “IPO Connect”. “These initiatives will make the markets in Hong Kong and the mainland more connected and integrated.” he says.

“The connection and integration can be expanded to cover more areas, including commodities, bonds and currency. Hong Kong and mainland regulators approved the ‘Bond Connect’ initiative in May. The programme aims to make the mainland’s bond market more accessible to overseas investors.” The bond trading link calls for a framework for clearing, custody, execution and settlement, Choi adds.

In the IPO Connect initiative, the connection and integration can also be expanded to include primary markets. HKEX has considered launching ‘IPO Connect’ to attract more cross-border listings to Hong Kong as well, Choi explains.