With the Hong Kong Special Administrative Region’s stock market connect programs with the Chinese mainland well entrenched for the SAR and global investors, financial experts have urged the city’s government to step up cross-border equity market connectivity and scale new heights. Oswald Chan reports from Hong Kong.
The Shanghai-Hong Kong Stock Connect, launched in 2014, and the Shenzhen-Hong Kong Stock Connect, unveiled in 2016, have become the main investment channels for global investors seeking access to the mainland and Hong Kong markets, and for mainland and Hong Kong investors to invest in overseas shares.
Currently, more than 70 percent of A-shares held by foreign investors are invested through the two connect programs.
For international investors, the northbound stock “through train” is the preferred mechanism for investing in mainland equities. As of Nov 10, the average daily turnover in northbound trading had reached 122.3 billion yuan ($19.23 billion) for 2021 — a year-on-year growth of 35 percent.
Listing regulation reforms over the past 10 years have successfully diversified Hong Kong’s IPO market. We believe these reforms could create further opportunities to strengthen Hong Kong as the best financial center in the region.
Benson Wong Wai-bong, PwC Hong Kong Entrepreneur Group Leader
The cumulative northbound Stock Connect turnover since its launch seven years ago has reached 64 trillion yuan, resulting in a net capital inflow into the A-share market of 1.5 trillion yuan. Hong Kong and global investors held a total of 2.6 trillion yuan in A-shares listed on the Shanghai and Shenzhen exchanges as of Nov 10, compared with 86.5 billion at the end of 2014.
At the same time, mainland investors have capitalized on the Hong Kong platform to invest in overseas stocks. As at Nov 10, the average daily southbound turnover had reached HK$44.1 billion ($5.66 billion) for the year — up 87 percent from the same period in 2020.
The cumulative southbound Stock Connect turnover has reached HK$23.1 trillion since its launch, bringing a net capital inflow of HK$2.1 trillion into the Hong Kong market. Mainland investors held HK$2.2 trillion worth of Hong Kong-listed shares through the Stock Connect programs as of Nov 10, compared with HK$13.1 billion at the end of 2014.
“Under the nation’s new development path of dual circulation, we will proactively promote connectivity between the Hong Kong and mainland capital markets, and encourage players in the financial services industry to explore the mainland market through the regional collaboration platform of the Guangdong-Hong Kong-Macao Greater Bay Area,” Hong Kong Chief Executive Carrie Lam Cheng Yuet-ngor told a financial seminar in December.
Market practitioners say that for the Stock Connect programs to reach new heights in 2022, financial regulators should amplify market infrastructure, introduce more A-share financial products, and improve the listing regime.
On infrastructure building, Hong Kong Exchanges and Clearing recently launched the HKEX Synapse pilot program to improve the efficiency and transparency of northbound settlements, and a new Master Special Segregated Account service for fund managers to support northbound trading. Other refinements made include removing the aggregate quota, increasing daily quotas and launching an investor identification model for both northbound and southbound trading.
HKEX will launch the Fast Interface for New Issuance (FINI) in the fourth quarter of this year to comprehensively streamline and digitalize the city’s IPO settlement process. When more companies list their shares in Hong Kong, it will expand the investment universe for mainland investors through northbound trading when more Hong Kong-listed shares are included in the Stock Connect.
Hong Kong and global investors held a total of 2.6 trillion yuan ($408.9 billion) in A-shares listed on the Shanghai and Shenzhen exchanges via the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect as of early November. (PHOTO PROVIDED TO CHINA DAILY)
Enriching A-share products
Meanwhile, offering more A-share-related financial products can spur the growth of the Hong Kong market’s interconnection product ecosystem and provide global investors with more abundant choices for those seeking investment opportunities on the mainland.
In December, HKEX clinched an agreement with the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE) and China Securities Depository and Clearing Corp (CSDC) on the inclusion arrangements for eligible exchange-traded funds in the Stock Connect programs.
The inclusion of ETFs will provide mainland and institutional investors with more options by broadening the existing product ecosystem of the Stock Connect programs, and support the continued development of the Hong Kong and mainland ETF markets by expanding the investor base.
HKEX, SSE, SZSE and CSDC will work closely on the details of inclusion, including business and technical preparations, such as amendments to related rules. It is estimated that the preparation work will take about six months to complete.
Before the inclusion of ETFs in the Stock Connect programs, there were three new ETFs listed in the Hong Kong Stock Exchange in 2021. They track the MSCI China A50 Connectivity Index, which covers the 50 largest stocks among major A-shares that are tradable through the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect, and includes at least two stocks in each industry to fully reflect economic conditions on the mainland.
Funds related to the Chinese economy in Hong Kong’s ETF market have continued to grow, covering a wider range. As of November, the total asset management value of mainland-focused ETFs accounted for about 25 percent of Hong Kong’s ETF market.
Derivative products relating to the A-share index have also emerged. In October, the HKEX launched its first A-share futures product — MSCI China A50 Connectivity Index Futures — which provides investors a financial tool to manage their investment risks in A-shares effectively. This can maintain Hong Kong’s leading position as an Asian derivatives hub, further advancing the city’s status as an international risk management center.
In the first month after the launch of the A-share index futures, the nominal value of open positions had exceeded $2 billion, and the average daily trading volume in November reached 11,927 contracts. HKEX CEO Nicolas Aguzin said the bourse operator has been expanding its uniqueness as a capital-raising center, making Hong Kong a preferred risk management center in Asia, and growing HKEX’s offshore A-share ecosystem.
Listing regime reform continues
The listing regime reform is also crucial in cementing the Stock Connect programs by increasing the number of Hong Kong shares that can be traded through northbound trade in the future.
In November, HKEX announced the outcome of proposals to enhance and streamline the listing regime for overseas issuers, It also expanded its secondary listing regime to welcome overseas-listed Chinese companies in traditional sectors to Hong Kong’s markets; and started permitting eligible issuers a dual-primary listing while keeping their weighted voting rights or variable interest entity structures. The changes took effect this month.
HKEX also announced new rules to create a listing regime for special purpose acquisition companies (SPACs) that will also take effect this month. The introduction of a Hong Kong SPAC-listing framework will be another attractive listing route for new and innovative companies to seek initial public offerings in the SAR, and will increase the investment universe for mainland investors.
“We welcome improvements to the listing regime for overseas companies and the new listing regime for SPAC, as they will help expand and diversify the portfolio of issuers and investment products in Hong Kong. They will further elevate Hong Kong’s status as a prominent mutual market in Asia,” said Dick Kay Man-wo, capital market services group’s offering service leader at Deloitte China.
Edward Au Chun-hing, Deloitte China Southern Region managing partner, said: “The initial SPAC regime of only allowing the participation of professional investors is the starting point for Hong Kong’s development into a multitier platform that will open to greater varieties of listing structures and offerings in the future.”
Looking ahead, PwC expects that the recent announcement of the new SPAC listing regime, the new economy and US-listed Chinese enterprises, the listing of biotech companies, as well as environmental, social and corporate governance (ESG)-related companies will drive the growth of the Hong Kong listing market.
“Listing regulation reforms over the past 10 years have successfully diversified Hong Kong’s IPO market. We believe these reforms could create further opportunities to strengthen Hong Kong as the best financial center in the region. Hong Kong’s bourse is agile and continues to evolve by embracing new models,” PwC Hong Kong Entrepreneur Group Leader Benson Wong Wai-bong said.
At the start of last year, mainland and Hong Kong financial regulators allowed mainland technology companies and pre-revenue biotech firms to be included in southbound trading of the Stock Connect programs after they have fulfilled certain conditions. By November, 45 such companies had been included as eligible securities under the two Stock Connect programs.
This followed a consensus reached by HKEX and the Shanghai and Shenzhen stock exchanges, allowing eligible A-shares listed on Shanghai’s Science and Technology Innovation Board (STAR Market), and their corresponding H-shares to be included in the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects as of February 2021.
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