HKEX Insight

Since launching in November 2014, Southbound Stock Connect has facilitated the flow of capital from Mainland China into Hong Kong’s equity markets and overtaken the Qualified Domestic Institutional Investor (QDII) scheme as the preferred route for Mainland investors seeking to allocate their capital overseas.

Mainland investor activity in Hong Kong’s equity market has increased markedly, becoming an increasingly important source of liquidity. 

Average daily turnover (ADT) on Southbound Stock Connect has grown from HK$900 million in 2014 to HK$33.8 billion in 1H 2023, according to official HKEX data, representing 14.7% of total ADT on the Main Board of the Stock Exchange of Hong Kong (SEHK). 

 

The number of Mainland funds with Hong Kong stock portfolios has increased from 238 in 2018 to 2,017 as of 2Q 2023, and the market capitalisation of Hong Kong stocks held by those funds has increased from RMB74 billion to RMB542 billion over the same time period, according to data from Wind.  

 
Since 2018, the market capitalisation of total shares held through Southbound Stock Connect has grown from HK$789 billion to reach HK$2.2 trillion by the end of 1H 2023.  

Since launch, HKEX has initiated and delivered on a series of enhancements to Stock Connect – improving efficiency, expanding the breadth of investment opportunities and increasing two-way capital flows.

These enhancements include:

1. Quota adjustments: Aggregate quotas on Shanghai-Hong Kong Stock Connect were removed in August 2016. And, in May 2018 the daily quota of net purchases was quadrupled for both Northbound and Southbound trading.
   
   
2. Increased number and types of tradeable securities: For Southbound trading, eligible securities have been expanded to include companies with a weighted voting rights (WVR) structure since August 2019; then pre-profit biotech companies since November 2020; and further to selected Hong Kong-listed ETFs since July 2022.
   
   Looking at ETFs specifically, six Hong Kong-listed ETFs have been added to Stock Connect by June 2023, and their Southbound ADT grew from HK$200 million in July 2022 to HK$2.9 billion in September 2023.
   
   
3. Inclusion of eligible international companies: Since March 2023, the scope of Southbound eligible securities has been expanded to include eligible international companies. Eligible companies must be primarily listed in Hong Kong and are either constituent stocks of the Hang Seng Composite LargeCap Index or Hang Seng Composite MidCap Index, or constituent stocks of the Hang Seng Composite SmallCap Index (HSSI) with a market capitalisation of at least HK$5 billion.
   
   Hang Seng Indexes Company (HSIC) has launched a market consultation on the eligibility of primary-listed international companies in Hong Kong for inclusion into the Hang Seng Index (HSI). If these companies are included in the HSI, existing and new ETFs tracking the HSI will start investing in them, potentially leading to an increase in the liquidity of these stocks.

The inclusion of international companies in Southbound Stock Connect is a major step forward - opening up the offshore investable universe for China’s onshore investors. At the same time, international companies can tap the vast Mainland investor population as well as the diverse and liquid international capital base that Hong Kong is already well known for with a single listing in Hong Kong.

Looking at capital pools in Mainland China alone, the potential for future growth, and increased flows through Southbound, looks strong. 

The vast Mainland retail investor population measured at 296.8 million A-share retail accounts drives turnover on the Mainland exchanges of close to RMB1 trillion per day. 

There remains significant potential for further direct household investment in capital markets. For example, total household deposits reached RMB163 trillion (USD22 trillion) by June 2023, according to data from the People’s Bank of China. 

Further, there’s room for Mainland investors to increase their overseas allocations.  

Mainland investors are comparatively underinvested overseas: with overseas portfolio investment as a % of GDP standing at 6.1% in 2020, compared with 70.1% in the US and 114.7% in Germany, according to balance of payments and GDP data compiled by the International Monetary Fund (IMF). 

Hong Kong is thus well-placed with Southbound Stock Connect growing in scope and Hong Kong itself being a preferred market for overseas asset allocation and portfolio diversification for Mainland investors.  

According to a 2021 survey by China Merchants Bank of high-net-worth individuals (HNWIs) in Mainland China, Hong Kong ranked first as a preferred overseas investment destination and transit market, because of its proximity and deep, well-regulated markets. 

Looking ahead, there’s significant scope to further enhance Southbound Stock Connect.

We see several ways in particular:

1. Inclusion of RMB Counters for eligible securities in Southbound Stock Connect. The HKD-RMB Dual Counter Model was launched in June 2023, which offers Hong Kong investors the choice of trading the shares of Hong Kong-listed companies in either HKD or RMB. Currently, only HKD counters of eligible securities are included in Southbound Stock Connect.
   
   Under the current Southbound Stock Connect mechanism, Mainland investors trade HKEX securities in HKD and settle their trades in RMB; they are therefore exposed to foreign exchange risks in their currency conversions of funds for settlement. To reduce potential exchange rate risks to Mainland investors, the inclusion of RMB Counters in Southbound Stock Connect is currently being explored by policymakers in Hong Kong and Mainland China.
   
   
2. Block trading. Block trading will facilitate the trading activities of eligible stocks of both domestic and international companies included in Stock Connect. For institutional investors, block trading can minimise trading costs and facilitate arbitrage and hedging activities. The Hong Kong Securities and Futures Commission and the China Securities Regulatory Commission made a joint announcement in August 2023 proposing the introduction of block trading under Stock Connect. HKEX is currently working closely with related parties in Hong Kong and Mainland China to develop an implementation plan.
   
   
3. Other enhancements. In addition, if Stock Connect could be extended to the primary market, allowing Mainland investors to subscribe for IPOs in Hong Kong, the profile of new listings and therefore their investor base could be widened, further enhancing stock liquidity. The resultant increase in stock liquidity would support product innovations such as ETFs and derivatives to enhance the product ecosystem for attracting more investors, thereby further driving up liquidity. This would in turn help attract new listings to widen investment choices in the Hong Kong market.

As the story of Southbound Stock Connect, and the Connect programmes more generally, has unfolded, it has succeeded in more closely connecting China and the world, and vice versa. This has also demonstrated the mutually beneficial collaboration opportunities that, in the future, could be expanded upon between HKEX and its Mainland exchange partners. 

Crucially, the Connect programmes still have a long way to run and the two-way capital flows between the Mainland and Hong Kong, still have ample room for growth. Southbound Stock Connect, coupled with the game-changing addition of international companies, has a key role to play in the coming years, supporting the continued growth of Hong Kong’s product and market ecosystem and further increasing the attractiveness of Hong Kong as a key fundraising hub and international financial centre. 

#1 What is Stock Connect?

Stock Connect is a Mutual Market Access Programme through which investors in Mainland China and Hong Kong can invest in each other’s markets. Stock Connect has two parts: Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect.  

 

#2 When did Stock Connect start? 

Stock Connect launched in 17 November 2014 with the Shanghai-Hong Kong Stock Connect. The Shenzhen-Hong Kong Stock Connect launched on 5 December 2016. 

 

#3 What is Southbound Stock Connect? 

Southbound Stock Connect allows qualified Mainland investors to trade eligible shares listed in Hong Kong. To find out about eligible shares for Southbound trading, click here.

 

#4 What is the impact of Southbound Stock Connect? 

Southbound Stock Connect has facilitated the flow of capital from Mainland China into Hong Kong’s equity markets and overtaken the Qualified Domestic Institutional Investor (QDII) scheme as the preferred route for Mainland investors seeking to allocate their capital overseas. 

Southbound Stock Connect is an important source of liquidity for Hong Kong’s equity market. Mainland investor activity in Hong Kong’s equity market has increased markedly. Average daily turnover (ADT) on Southbound Stock Connect has grown from HK$900 million in 2014 to HK$33.8 billion in 1H 2023, according to official HKEX data, representing 14.7% of total ADT on the Main Board of the Stock Exchange of Hong Kong (SEHK). 

 

#5 What is the difference between Northbound and Southbound Stock Connect? 

Southbound Stock Connect allows qualified Mainland investors to trade eligible shares listed in Hong Kong. Northbound Stock Connect allows Hong Kong-based investors to trade eligible A-shares on the Shanghai or Shenzhen stock exchanges. 

 

#6 What can investors buy and sell through Southbound Stock Connect? 

For the most up-to-date information on Stock Connect, please refer to the detailed FAQs here.

 

#7 What was the average daily trading volume of Southbound Stock Connect in 2022? 

Average daily trading volume of Southbound Stock Connect in 2022 was HK$31.7 billion, according to HKEx data. For more annual statistics please visit the HKEX Annual Market Statistics site here.

 

#8 Which stocks are most actively traded on Southbound Stock Connect? 

Data on the most actively traded stocks can be found on the HKEX Stock Connect Statistics page, which offers daily and monthly statistics on trading activity on the Southbound and Northbound channels. Click here. 

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