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Stock Connect: The Bigger Picture

Updated: 05 Nov 2015
Charles Li Direct Page

Video blog 1: What are your reflections on Stock Connect on its first anniversary?

Video blog 2: What is the strategic significance of Shanghai-Hong Kong Stock Connect on the financial markets?

Video blog 3: What are HKEx's next steps after Shanghai-Hong Kong Stock Connect?

One year ago my colleagues at HKEx were busy getting ready for the start of a ground-breaking new programme called Shanghai-Hong Kong Stock Connect.  We had the rules in place, the regulators had established cross-border regulatory cooperation, and technical preparations were ready.  Our primary goal at the time was to ensure the programme launched smoothly.  Evaluating early trading volumes was secondary, because Stock Connect was going to be a long-term component of our market's infrastructure.

It's amazing how fast a year can go by.

Here we are at the one year anniversary, and already people have been asking me to look back on Stock Connect and evaluate the scheme after its first year.  Personally I do not like to spend too much time reflecting on past milestones; I like to look forward, and we're already working on a number of other initiatives.  But given the significance of the anniversary, I'd like to share a few thoughts about what Stock Connect has meant to Hong Kong, and particularly what it means for our future.

First, there are the raw statistics.  Total trade value going North into the Mainland was at RMB1.475 trillion from the start of Stock Connect to the end of October, using up RMB142 billion, or 47 per cent, of the aggregate quota.  There was a record trading day on 6 July this year, when Northbound trading turnover hit RMB23.4 billion.  Southbound total trade value was HK$721 billion up to the end of October, using up RMB89 billion, or 36 per cent of the quota.  Our biggest trading day Southbound happened on 9 April, with turnover of HK$26.1 billion.  It is worth noting that – in the context of high Mainland market volatility – the past three quarters were the Hong Kong stock market's best in terms of volume in the past five years.  Perhaps more importantly, the Stock Connect mechanism performed without any operational lapses – notwithstanding the many operational differences between the two markets – and Hong Kong smoothly weathered the Mainland market turbulence and the authorities' subsequent rescue measures.  This is indeed a tribute to the maturity of the Hong Kong market, its regulators, investors and intermediaries, and augurs well for Hong Kong's longer-term potential to handle Mainland and international investment flows.

There is still a lot of room for improvement in Stock Connect, in terms of new products, expanded quotas, enlarged stock eligibility criteria, and more.  We are also excited about Shenzhen Connect, which will open up another Mainland market for international investors and strengthen Mainland links with Hong Kong.

But the focus shouldn't be on aggregate quota usage or trading turnover, because Stock Connect is much bigger than that: it's a catalyst, and a model, for the future.  It shows us what's possible when we innovate and exploit the great advantages Hong Kong has under "One Country, Two Systems", and the benefits we can earn by working alongside Mainland China as it grows and internationalises.  It unlocked a door to the Mainland, and in future will likely be seen as the pre-cursor to a new generation of cross-border regulatory cooperation and market connections.

Our vision is to transform HKEx into a global exchange group by facilitating China's opening and bringing benefits to Hong Kong.  For the last 20 years, we have been an equity market that is very good at pricing companies, launching IPOs and trading equities.  This has been our bread and butter for a long time, and because we have such a deep and liquid market we had a strong value proposition when we began building Shanghai-Hong Kong Stock Connect.  This first bridge gave Mainland investors access to the Hong Kong equity market using their own regulations and clearing houses, making going "international" much more comfortable and familiar, and conversely gave international investors access to Mainland China equities under a familiar regulatory and legal framework.

True financial centres, however, go beyond equities.  They price more than companies; they also price goods and money.  China is the biggest consumer and producer of many bulk commodities, yet is poorly integrated with world commodity markets.  As a result, China does not feel that it has the proportionate level of influence over global commodity prices that it deserves.  Meanwhile, China's home-grown commodity markets cannot truly reflect global market prices because they are still largely closed off.  There's no reason Hong Kong couldn't play a role here, but traditionally we've had no products to trade – we haven't been a commodities hub so have had no strong value proposition.  But our 2012 acquisition of the London Metal Exchange, which hosts over 80 per cent of global on-exchange base metals trading, gives us the chance to bring global products into Hong Kong.  This is the rationale behind our second, cross-continental bridge – London-Hong Kong Connect: to give traders in the Asian time zone access to LME products denominated in RMB with Hong Kong's own legal, regulatory, trading and clearing apparatus.  Over the longer-term, we envision Chinese players exerting their pricing power more directly through a similar commodities connect scheme with Hong Kong, in a familiar regulatory environment, and have those trades relayed back to London via the London Connect.  We are building our value proposition and securing Hong Kong's place as a trusted partner for the Mainland.

The most significant financial centres are able to price money, and that is our long-term objective.  With the RMB offshore market expanding, Hong Kong is well set to grow in its role as a major pricing centre for the RMB.  We are tackling that directly via our RMB futures product, which has seen an encouraging increase in turnover recently.  However, another way for us to promote RMB is via commodities.  In the international markets, commodities are nearly all denominated in international currencies.  China's interests can be served if many of those commodities could be denominated, traded, and cleared in RMB, something we can make happen in Hong Kong.  By combining commodities and currencies, we can potentially fully develop our FICC market and solidify our role as a significant global financial centre.

These plans require building more bridges, creating more connectivity, and more networks.  None of this would have been possible – or it would have taken much longer – without Shanghai-Hong Kong Stock Connect as a precedent.  It is a vital piece in the bigger picture of China's connections with global markets via Hong Kong.  Stock Connect showed what could be done when we innovate, work across boundaries and join hands with regulators, and it laid the foundation and set the stage for the future.  That will be Shanghai-Hong Kong Stock Connect's enduring legacy.


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