Research and analysis

Hong Kong: Shanghai/Hong Kong Stock Connect (SHSKC)

Published 2 December 2014

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk – Hong Kong

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk – Hong Kong

Summary

Shanghai-Hong Kong Stock Connect (SHKSC) up and running. Despite modest trade flows during first two weeks, particularly into Hong Kong, it could be a giant leap towards open capital markets in China. UK firms at the forefront, confident demand will pick up and looking to next steps.

Detail

The Shanghai-Hong Kong Stock Connect (SHKSC), which enables investors to access Mainland China’s A-share market though Hong Kong, and Mainland investors to invest in Hong Kong, went live on 17 November . Operationally, it has worked well. It has linked two “fundamentally different markets” and come on line remarkably quickly – time from announcement to launch, seven months.

Day one saw a rush ‘northbound’ from Hong Kong to the Mainland. The daily quota (RMB13bn) was hit before 2pm. ‘Southbound’ flow was sluggish, filling 17% of the RMB10.5bn quota. Demand then slackened: in week two, less than 20% of daily quotas were filled.

Market participants and regulators agree that this measured pace is preferable to a hyperactive SHKSC that trips quotas daily, risking volatility. Practitioners attribute the slow-ish start to three factors:

• All China stocks bought in Hong Kong are ‘owned’ by the Hong Kong Exchange (HKEx) clearing house, which then allocates the rights to the investor. EU-regulated funds are prevented from participating by the EU regulator which is not yet satisfied this structure offers adequate investor protection.

• Institutional investors, always slower to move, have not yet entered the market. They are expected to start in the New Year.

• The MSCI Index, commonly tracked by stock funds, does not yet include Chinese stocks. This is expected to change in June – SHKSC the driver.

Analysts agree southbound trades will continue to lag because:

• Strict rules limit who from the mainland may invest in Hong Kong. Those who qualify already have other means of accessing the Hong Kong market.
• If the RMB continues to appreciate, nominal profits may turn into losses as they are re-converted into RMB.
• Investors are more bullish on Mainland Chinese than non-Chinese stocks.

SHKSC has cemented Hong Kong’s position as China’s prime international financial centre and test-bed for economic and financial reform. It should in time boost listings on HKEx. On next steps, HKEx aims to:

• Lift quotas and restrictions on the existing scheme.
• Incorporate the Shenzhen Stock Exchange, making the combined exchanges second largest by market cap worldwide.
• Move into other sectors – commodities (much of which will be via HKEx-owned London Metal Exchange, with tangible UK benefits), futures, bonds and the primary market.

UK market participants agree on the long-term potential and want to make the most of it.

Comment

Despite the modest start, the SHKSC is a success. It could be a giant leap for economic liberalisation in China. SHKSC will share open market practice and experience with Mainland China. It is the starting point for global markets to access the estimated $1.1-$1.2trn capital pool that cannot presently invest easily beyond China; and as all trades are RMB-denominated, it is another milestone for the rise of the RMB. Indeed, one UK practitioner described it as “the beginning of the end of China’s closed capital account”.

Disclaimer

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