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Connect helps drive inclusion of Chinese assets into international indices

Updated: 03 Sep 2018
Charles Li Direct Page
Stock Connect and Bond Connect have both been given big stamps of approval over the past few weeks as global index compilers add Chinese assets into their major international benchmark indices for the first time.

MSCI completed the second phase of its A share inclusion plan last Friday, a key milestone that has already seen US$32 billion passively tracking the indices injected into the A share market since the first phase of inclusion on 31 May this year. Analysts expect that number to grow substantially over time as China becomes more integrated with global markets. Meanwhile, FTSE Russell intends to unveil its potential plans for inclusion later this month. Together, these moves will drive massive international fund flows into the Mainland market, fueling China’s plans to internationalise its capital markets and bringing tremendous value to investors and market players in Hong Kong and globally.

Index inclusion and the subsequent fund flows were part of our vision when we launched Shanghai-Hong Kong Stock Connect back in 2014. I described Stock Connect at the time as a bridge, and HKEX as bridge-builders. We knew there might be few cars crossing the bridge in the early days, but we were determined to keep improving it in anticipation of heavy traffic later. We tackled many issues soon after launch, such as implementing Special Segregated Accounts and abolishing the aggregate quota, to make Connect more seamless. Since then, Stock Connect has proven to be a robust, reliable investment channel that has won the confidence of international regulators and investors. In addition, it has infused the Mainland market with a dynamic new form of investment that is bringing China closer to the international community; just last month, the Shanghai Stock Exchange implemented a Closing Call Auction Session, bringing it even more in-line with international practice.

Shenzhen Connect was a natural next step, which we launched in 2016. Then we branched into an entirely new asset class with Bond Connect, which recently celebrated its first anniversary.

Like Stock Connect, Bond Connect is also gaining momentum. On 24 August we upgraded the Bond Connect settlement system to fully implement real-time delivery-versus-payment (RDVP), allowing the payment and delivery of securities to happen simultaneously. RDVP is a prerequisite in many jurisdictions for investors to participate in financial markets, and its implementation tears down that barrier and drastically reduces the exposure to settlement risk by the counterparties of a trade.

Last Friday (31 August) we introduced a host of other technical improvements including the introduction of block trade allocations and reduced trading sizes, meeting two of three main conditions for inclusion into the benchmark Bloomberg-Barclays Global Aggregate Index. The third, a clarification on taxes from Chinese regulators that provides a three-year grace period for offshore bond investors, paves the way for Mainland bonds to be included in the Bloomberg-Barclays index next April and potentially other global benchmarks soon. The market believes RDVP alone will generate greater interest from central banks and other active investors that could drive US$500 billion Northbound, and index inclusion could send another US$100 billion through Bond Connect into China’s interbank bond market. This represents a major breakthrough for Bond Connect and our overall fixed income strategy.

In just four short years, we’ve progressed from taking our first step with Shanghai Connect to sustained two-way fund flows to inclusion in major global benchmark indices. We continue to work with regulators and exchanges on both sides to find ways to enhance the scheme, such as further expansion into the fixed income space, and making it even more convenient and efficient for investors. The benefits of the Connect programme are clear. Index inclusion helps China grow and diversify, highlights the value of Hong Kong as a global financial centre to both China and international investors, and proves we can thrive when we stay true to our mission of connecting China with the world. It’s a role only Hong Kong can play – we are a trusted partner of the Mainland and have the confidence of the international community.

China remains as committed as ever to developing its capital markets. As we will continue to show, Hong Kong is the lynchpin that can help make it happen.

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