One year ago China entered a new stage of its liberalization path. At this time the stock connection between Hong Kong and Shanghai began to function, enabling a two-way portfolio investment flows. In fact, for the first time international investors had direct access to mainland “A-shares” and vice versa for Chinese investors. This venture was a significant step towards the opening of China’s equity market because previously only individually approved foreign institutional investors could trade mainland-listed stocks. It was also considered an opportunity to diversify the portfolio of Chinese investors who were precluded to enter Shanghai’s international equity market.
There are still some restrictions in the program, however, such as the quotas that limit the size of the flows. These are set for northbound trading (mainland to Shanghai) at 300 billion yuan while southbound trading is lower, to 250 billion yuan. In addition, only Chinese investors who have 500,000 yuan (about $80,000) on account can have access to Hong Kong listed-shares.
The overall yearly performance can be considered as quite good. After a slow start the trading link encountered growing interest as more and more funds and financial institutions began to offer products which used the stock connection. Then, too, investors were also attracted by the profitable opportunities which could be taken due to the price gap between stocks of big firms quoted on both markets.
What is interesting to analyse is the market landscape the “through train” has brought. First of all, the link created a single “China” stock market and upgraded it to the first three places of the biggest markets in the world for both market capitalization and daily trading turnover, a considerable and significant achievement.
Secondly it enabled Chinese capital markets to be integrated with the international financial system and bring more professionalism and efficiency in terms of more corporate governance requirements and controls and a higher percentage of daily trading turnover by institutional investors.
Lastly it injected liquidity in the Chinese economy to successfully sustain the switch form a fast-pacing manufacturing economic system to a more consumption-oriented one. Maintaining this track, the project is concrete evidence of China’s efforts to seek and gain a central position in the economic and financial scenario. The country is implementing reforms in order to be considered in the international benchmark indices, such as those compiled by MSCI and FTSE and obtain the yuan inclusion in the International Monetary Fund basket of elite reserve currencies joining the yen, dollar and euro.
In order to become more appealing, the two bourses are currently working on loosening the rules of the program widening initial quotas and providing access for mainland investors to Hong Kong IPOs as well.
Another “through train” will be the Shenzhen Hong Kong Connect which is still under regulator’s approval so there is no set date. Shenzhen stock market could attract more investors due to quoted start ups and new economy firms in the technology, pharmaceutical and clean energy sectors.
In September the Hong Kong Exchanges & Clearing Ltd CEO Charles Li said they are planning links for commodities, bonds and derivatives as well. There are also rumors of a London-Shanghai trading link but because of technical issues such as time zone problems for settlement and clearing, the program does not appear feasible.
Vittoria Roà
There are still some restrictions in the program, however, such as the quotas that limit the size of the flows. These are set for northbound trading (mainland to Shanghai) at 300 billion yuan while southbound trading is lower, to 250 billion yuan. In addition, only Chinese investors who have 500,000 yuan (about $80,000) on account can have access to Hong Kong listed-shares.
The overall yearly performance can be considered as quite good. After a slow start the trading link encountered growing interest as more and more funds and financial institutions began to offer products which used the stock connection. Then, too, investors were also attracted by the profitable opportunities which could be taken due to the price gap between stocks of big firms quoted on both markets.
What is interesting to analyse is the market landscape the “through train” has brought. First of all, the link created a single “China” stock market and upgraded it to the first three places of the biggest markets in the world for both market capitalization and daily trading turnover, a considerable and significant achievement.
Secondly it enabled Chinese capital markets to be integrated with the international financial system and bring more professionalism and efficiency in terms of more corporate governance requirements and controls and a higher percentage of daily trading turnover by institutional investors.
Lastly it injected liquidity in the Chinese economy to successfully sustain the switch form a fast-pacing manufacturing economic system to a more consumption-oriented one. Maintaining this track, the project is concrete evidence of China’s efforts to seek and gain a central position in the economic and financial scenario. The country is implementing reforms in order to be considered in the international benchmark indices, such as those compiled by MSCI and FTSE and obtain the yuan inclusion in the International Monetary Fund basket of elite reserve currencies joining the yen, dollar and euro.
In order to become more appealing, the two bourses are currently working on loosening the rules of the program widening initial quotas and providing access for mainland investors to Hong Kong IPOs as well.
Another “through train” will be the Shenzhen Hong Kong Connect which is still under regulator’s approval so there is no set date. Shenzhen stock market could attract more investors due to quoted start ups and new economy firms in the technology, pharmaceutical and clean energy sectors.
In September the Hong Kong Exchanges & Clearing Ltd CEO Charles Li said they are planning links for commodities, bonds and derivatives as well. There are also rumors of a London-Shanghai trading link but because of technical issues such as time zone problems for settlement and clearing, the program does not appear feasible.
Vittoria Roà