The Shanghai-Hong Kong Stock Connect scheme was launched in November last year and although it was highly anticipated by global investors, it has seen a lukewarm start. There are several reasons for this and I don’t think any of them are fundamental problems.
"Despite the slow take-up, the Connect scheme... has enhanced Shanghai’s status as an international financial centre while strengthening Hong Kong’s role as a gateway for China."
Ivy Au Yeung, CEO, ANZ Hong Kong
The more risk-averse institutional funds want to ensure trading systems are operating smoothly before dealing in large volumes. Meanwhile, many tracker funds will wait until MSCI includes China A-shares in its benchmark indices.
And don’t forget, Shanghai’s stock market had been among the worst performing markets globally in recent years before its latest bounce and the benchmark SSE Composite Index is still well below its 2007 peak.
Despite the slow take-up, the Connect scheme remains a key milestone in China's capital market liberalisation. It has enhanced Shanghai’s status as an international financial centre while strengthening Hong Kong’s role as a gateway into China.
Importantly for investors, the historical reform opens up bilateral portfolio flows and provides unprecedented access to investing in China’s equity market directly, in addition to the existing QFII and RQFII schemes.
The Connect scheme controls the flows on a consolidated basis as opposed to previously firm-based licensing. So the link-up program will bypass many complicated application and approval procedures and red-tape. The daily quota totals RMB23.5 billion ($A4.8 billion), and if fully utilised, could result in a total flow of roughly RMB470 billion a month. This is larger than the average value of cross-border RMB trade-related remittance between Hong Kong and the Mainland (which is estimated at RMB350 billion). So the RMB payment flows are massive.
Moreover, the mutual access means Hong Kong immediately becomes China’s ‘international board’. Chinese investors, including pension funds, other institutional investors and high-net-worth individuals, will have the access to high quality foreign companies listed in Hong Kong.
From an historical context, compared with Japan in the past, China has noticeably stronger pressure to invest abroad given its higher foreign reserve position (Figure 1). China is expected to invest more abroad. Before China opens its domestic stock exchange for foreign companies, Stock Connect will encourage more multinational corporations (MNCs) to use Hong Kong as a short cut should they want to attract Chinese investors, boosting IPO activities in Hong Kong in the long run.
Our chief Greater China economist at ANZ, Liu Li-Gang, says Hong Kong’s regulatory standards are perceived to be higher and more transparent. Hong Kong is also a platform for China’s state-owned enterprises (SOEs) to tap the global investor base. Li-Gang believes the mutual access will likely encourage more high quality Chinese companies to list in Hong Kong.