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Mutual Market Access 2.0

Updated: 01 Dec 2016
Charles Li Direct Page

We are on the eve of another major milestone for HKEX: Shenzhen Connect.  Launch day, set for next Monday, is special for us because it symbolises the beginning of Mutual Market Access 2.0, following Shanghai Connect’s launch in 2014.  It links the secondary equity markets between Hong Kong, Shanghai and Shenzhen for the first time, making it, when combined, the second largest stock market in the world after the United States.

We have been on the road for the past several weeks introducing international investors to Shenzhen Connect, with more than 50 meetings with investors across Europe and North America.  The response has been very positive, with many investors enthusiastic about the opportunities that are being brought with the new cross-border trading scheme.  We have also been traveling around Mainland China, with forums in Shenzhen, Shanghai and Beijing to introduce Hong Kong’s market and share with Chinese investors some of the benefits of investing here.  We are all excited about the long-term prospects of Shenzhen Connect, and the mutual market programme in general.

We’ve heard a lot of feedback from international investors, and we’ve been working with our counterparts in Mainland China since the launch of Shanghai Connect to address some of their concerns.  For instance, the aggregate quota was abolished in August so institutional investors can trade confidently without fears of potentially bumping up against a limit.

We also introduced a mechanism last year that largely resolves international investors' concerns over the Mainland's pre-trade checking requirement, which made some investors reluctant or unable to trade through Stock Connect.  The Special Segregated Account service means investors are only required to transfer shares they are passing to their broker for settlement after their sell orders are executed, which is similar to how they settle trades of Hong Kong-listed stocks. Both of these moves further lowered the barrier to participation.

We have also largely resolved the issue of beneficial ownership in A shares held through the nominee structure established under Stock Connect, alleviating some investors’ concerns that they would not have proprietary rights over the A shares held through the Hong Kong Securities Clearing Company.  Last year, the China Securities Regulatory Commission clarified the role of HKSCC under the Hong Kong and Mainland China legal and regulatory frameworks, and most investors now accept that they do have beneficial ownership under both Hong Kong law and Mainland law, which eases those concerns.

Over the last year, we have broadened the list of eligible investors to welcome more people to trade through the Connect scheme.  Mainland funds began using Stock Connect last year, and they’ve now become an important component of Southbound trading.  Mainland insurance funds were given the green light to use Stock Connect recently as well, and we believe they will become active players over time.

Shenzhen Connect also brings along some notable improvements, including an expanded list of eligible stocks.  Shenzhen is known as China’s Silicon Valley, and is home to some of the country’s most exciting technology and new economy companies.  Foreign investors will now have direct access to this exciting frontier for the very first time.  About 880 stocks in Shenzhen are eligible for Northbound trading, opening up a plethora of new opportunities.  While investors in Mainland China will generally have the same choice of stocks in Hong Kong through both Southbound channels, they will also have access to 100 small cap stocks in the Hang Seng SmallCap Index for the first time exclusively via Shenzhen Connect, giving Mainland investors more investment choices and opportunities.

So what can we expect once the new link begins? As I’ve said before, I’m less concerned about the immediate market reaction because Stock Connect is a long-term market facility. Its impact will be judged in years, not in days or weeks.  We expect Southbound trading under Shenzhen Connect to take some time to grow, as Southbound investors who have been using Shanghai Connect can continue doing so unless they are attracted by the 100 small caps in Hong Kong exclusively available via the Shenzhen Southbound channel.  Northbound investors, who are no longer subject to the Aggregate Quota, can invest at their own pace in the Shenzhen market according to their investment strategies.

From a big picture perspective, Shenzhen Connect will lead to the further integration of the Chinese and international markets. While the two markets have big differences in terms of regulation and investment philosophy, the increased interaction between investors, regulators and market participants under Stock Connect will help the markets learn from each other, and hopefully our future marketplace will be the one with the best and most advanced features of both sides.

Stock Connect will also be here for a long time, even as Mainland China continues to open up. While sophisticated investors will have the means to invest directly into China and some Mainland investors have the knowledge and ability to go abroad, Stock Connect will continue to be a reliable platform for investors who seek access to investible assets abroad from the comfort of their home market rules.

Mutual Market Access also has an important meaning for Hong Kong.  We have always played a vital role in different stages of China’s financial market development.  This began in 1993 when the H share regime started, and Hong Kong facilitated the fundraising needs of Mainland companies as they grew and became global leaders.  In the process, Hong Kong cemented its position as a global financial centre.  Now as China’s needs have evolved, so has our role.  With Mutual Market Access, overseas investors can make use of Hong Kong as a convenient access point to Mainland China, while Mainland investors can use Hong Kong as their first stop as they begin to diversify their assets beyond Mainland China’s borders.  Over time, this influx of capital from the Mainland will make Hong Kong a focal point for international products. By playing this dual role, Hong Kong will grow as a wealth management centre alongside our traditional role as a global capital formation centre.

With the secondary equity markets now connected, we are setting our sights on growing the Connect model. Next, ETFs will be added under Stock Connect, and then we plan to expand into other areas such as primary listings, commodities, bonds and more. Our team is working hard to realise these dreams, which will further strengthen Hong Kong, and I hope we have something else to announce soon.


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