A new chapter begins…
Oct 11, 2022
10 mins

What is Hong Kong’s future role as an International Financial Centre (IFC)?

Hong Kong’s core role, at the interface between Mainland China and the World, remains and is perhaps more needed and more vital than it has ever been.

This superconnector role is unique, not because there is no alternative, but because Hong Kong adds value on so many levels. And nowhere is this more apparent than in capital markets.
Nicholas Aguzin

The depth, breadth, diversity and opportunity that define Hong Kong as an IFC are part of its DNA. And as much as these have shaped its past, so will they shape its future.

What is exciting, is that the path ahead is opening as we speak because we are starting a new chapter in Hong Kong’s connect story with a clear and opportunity-rich future as a leading IFC.

Our connect story

But before looking to the story ahead, it is important to go back in time and reflect on the connect story to date. Let’s go back to 2014.

Then, global investors were demanding better and easier access to China’s growth story and onshore investors were looking for more and more diversification opportunities.

The answer came in the pioneering launch of Stock Connect. The programme first linked Hong Kong and Shanghai in November 2014, then extended to Shenzhen in December 2016, opening opportunities for two-way capital flows and driving combined average daily volume on both Northbound and Southbound channels from HKD 21 billion per day in 2017 to HKD 186.6 billion per day in 2021.

Then, in July 2017, we launched Bond Connect, connecting international investors with China’s fast-growing fixed income markets, with trading volume growing from RMB 276 billion in 2017 to 6.4 trillion in 2021 and international investors’ onshore fixed income holdings increasing from RMB 0.9 trillion in July 2017 to RMB 3.7 trillion in June 2022.

It is almost impossible to reimagine today’s global markets without these programmes and, despite several similarly named ‘connect’ programmes in other parts of the world, they remain unique pipes of connectivity – not founded on fungibility, but on actual two-way flows.

And, more than opening channels, we have steadily grown the China investing product ecosystem here in Hong Kong developing A-share ETFs, USD/CNH Futures and Options, the MSCI product suite, most notably including the launch of the MSCI China A50 Connect Futures contract in October 2021.

A new chapter begins….

Now, we are at the start of a new chapter.

Starting in July this year, a number of fundamental and game-changing developments have begun to unfold.

First, was the inclusion of ETFs in Stock Connect and the announcement of a new Swap Connect in July.

This was then followed by Stock Connect trading calendar enhancements in August; and then three further significant developments were announced in September, which – when implemented – have the potential to radically again redefine regional – and global – markets.

These three new initiatives have the potential to include Hong Kong-listed international companies, significantly increase the number of eligible stocks on Stock Connect, add RMB trading counters to Hong Kong Stock Connect and offer Treasury bond futures in Hong Kong.

A potential gamechanger

The details of these new initiatives are still to be fully defined but they will have significant implications. In essence, these breakthrough initiatives amount to an effort to strengthen connectivity between China and the world, with Hong Kong playing a crucial role.

The proposed inclusion of international companies in Southbound Stock Connect, in particular, is a potential game changer because – for the first time – it will allow retail investors from the Mainland to buy international stocks in Hong Kong, which will make Hong Kong’s listing platform much more attractive to potential international issuers.

The proposed inclusion of international companies offers great strategic significance to both Mainland and Hong Kong because it means that Mainland regulators want Hong Kong to play a bigger role in promoting financial recoupling, this in turn will further strengthen Hong Kong’s position as a global fund-raising hub, provide Mainland investors with a wider range of investment options and grow liquidity in Hong Kong’s markets. The circle becomes virtuous: the market becomes richer, deeper and more liquid.

The inclusion of ETFs in Stock Connect creates opportunities for both mainland and international investors and adding ETFs to the southbound channel underlines Hong Kong’s importance in supporting Mainland China investors’ demand for exposure to the latest economic and financial trends in global markets.

The proposed launch of Swap Connect and Treasury Bond futures will give international investors unique risk management tools for China’s bond markets. International investors are increasingly active in onshore China fixed income and are demanding a wider range of risk management tools, particularly amid recent market volatility.

Looking at the longer-term, as Hong Kong develops its position as Asia’s risk management hub and adds more RMB risk management tools, the overall upside for fixed income derivatives in Hong Kong could be significant.

Finally, the addition of RMB trading counters to allow mainland Chinese investors to trade Hong Kong-listed shares in either HKD or RMB will simplify settlement processes – making the whole process more accessible and efficient and potentially bringing more retail investors into Southbound Stock Connect.

The initiative has the potential to also help expand channels for two-way cross-border RMB capital circulation, deepening liquidity in Hong Kong’s offshore RMB market and driving the RMB internationalisation process. At a time when other IFCs are competing for RMB business, the launch of the RMB counter initiative puts Hong Kong in a prime position to promote RMB trading to the international market.

Realising the Big Bang of Finance opportunity

All these initiatives and enhancements are foundational in bringing the China growth story to international investors, promoting the internationalisation of the RMB and supporting Chinese capital in accessing global opportunities.

Together they realise the huge opportunity from the Big Bang of Finance – a process where reforms, connectivity innovations and capital flows will increase the size of China’s capital markets to more than US$100 trillion in the next decade or so.

These developments will only serve to make Hong Kong’s superconnector status ever greater and more vital. HKEX’s role as China's preferred offshore fund-raising centre will be strengthened, our position as China’s go-to offshore risk management centre will be enhanced and we will gain further traction as we leverage and expand our China–related product offering.

If not now…then when?

These developments are great news for Hong Kong’s markets; but we are not complacent.

At HKEX we are surrounded by immense opportunity. But where there is opportunity there is competition. It will be up to us and our community in Hong Kong and our partners across the region, to work together to shape our shared successful and sustainable future. We need to fully grasp the opportunities ahead.   

And if not now, then when?

Now is the time. It’s an unprecedented time in the evolution of global markets and our stakeholders are looking to us to take the lead.

A time to balance risk and reward, costs and benefits – but perhaps a time too to be brave, courageous and bold. A time to create more connectivity, not less. A time to build on the successes of the past, to learn from the challenges that have gone before.

Now is the time to build the Marketplace of the Future

We have a dedicated and passionate team at HKEX and a clear strategy. We are committed to working with our clients and our full suite of valued stakeholders to deliver success not only for ourselves, but for them too. Our eyes are on the long-term.

We have much more to do to realise our key goal of growing liquidity and velocity in our markets and delivering on our vision to build the Marketplace of the Future: this is not just a simple destination but rather a mindset and an ambition and a vision that builds on our existing strengths. We want to create a business and a market that our regional and global customers and stakeholders want to be part of.

As the world’s centre of gravity pivots East, we are focused on securing our place as an international exchange leader, fully aligned with our stakeholders’ needs and leveraging our strength as a global superconnector.

We are doing this by focusing on our unique China expertise and access; diversifying our business to connect capital with ideas; and actively embracing the trends and dynamism that are shaping our industry.

The Marketplace of the Future will offer our customers and stakeholders a real-time, highly automated, intuitive, digitally-enabled experience, all provided in a cost competitive way.

It will support traditional and new asset classes, offering greater choice and opportunity, whilst at the same time never wavering on its commitment to resiliency, efficiency and innovation.

Our vision is underpinned by a steadfast, purpose-driven organisation, where ambitious, empowered, collaborative colleagues are resolutely focused on the long-term sustainable future of both our markets and our community. 

We are building the Marketplace of the Future for the prosperity of all.

A new and exciting chapter is unfolding for Hong Kong, and we are at the heart of it.