The gong simultaneously sounded in Shanghai Stock Exchange (SSE) and Hong Kong Exchanges and Clearing Limited (HKEx) on Nov. 17 last year declared the official launch of Shanghai-Hong Kong Stock Connect that links the capital markets of the Chinese mainland and the world. Since then, direct investment access to the stock markets in Shanghai and Hong Kong is available. The stock market of the Chinese mainland is directly open to global capital for the first time, while investors from the Chinese mainland also start their way of global asset allocation.
SSE and HKEx report us the performance of the Shanghai-Hong Kong Stock Connect at its anniversary. Though the overall transaction is not really hot, but the program is “stable and safe” in operation and demonstrates the whole world that such open model of capital market with joint regulation from both sides, two-way access, closed operation and controllable risk, pioneered by the Shanghai-Hong Kong Stock Connect, is completely feasible.
In fact, under the Chinese mainland’s unswerving efforts in promoting two-way opening of capital market and the internationalization of RMB, the Shanghai-Hong Kong Stock Connect mode has been applied in the interconnection between the Chinese mainland market and other markets. Shanghai Stock Exchange, China Financial Futures Exchange and Deutsche Börse AG jointly establish China Europe International Exchange AG; the Shanghai-London Stock Connect is under mulling; the Hong Kong-London Stock Connect, as the prelude of the interconnection between the bulk commodity markets in the mainland and abroad, has also launched preparation.
As the first anniversary of the Shanghai-Hong Kong Stock Connect comes, Huang Hongyuan, the SSE general manager, and Charles Li Xiaojia, CEO of HKEx, published key information, including “jointly optimize and improve the Shanghai-Hong Kong Stock Connect” and “make preparations for the launch of Shenzhen-Hong Kong Stock Connect”, on the Shanghai Securities News (SSN), arising our expectations towards a new era of comprehensive interconnection.
Performance of Shanghai-Hong Kong Stock Connect
As to stable and safe operation, the Shanghai-Hong Kong Stock Connect responds the market with satisfactory answer.
The brainstorming on “the interconnection of the transaction and clearing between SSE and HKEx” by Gui Minjie, the SSE chairman, and Charles Li, CEO of HKEx, in Shenzhen in 2012 was fully implemented in the more than 200 trading days in the past year.
Data provided by the HKEx to SSN shows that in the past 230 trading days, the total trading value of northbound stocks had reached 1.538 trillion yuan, using up 121 billion yuan, or 40 percent, of the aggregate northbound net-buy quota of 300 billion yuan. The average daily transaction reached around 6.7 billion yuan, and the record trading day for northbound orders was on July 6 this year, with northbound turnover amounting to 23.4 billion yuan.
The total trading volume of the southbound stocks has reached 742 billion Hong Kong dollars, using up 92.4 billion yuan, or 37 percent, of the aggregate southbound net-buy quota of 250 billion yuan in the past 225 trading days. The average daily transaction reached around 3.3 billion Hong Kong dollars, and the peak for southbound trading was recorded on April 9 this year, with the day’s turnover reaching 26.1 billion Hong Kong dollars.
As to the quota, both the aggregate northbound net-buy quota of 300 billion yuan and the aggregate southbound net-buy quota of 250 billion yuan were not exhausted in the first year, but both of them had the experience of using up daily quota in the past year.
As early as the first day that the Shanghai-Hong Kong Stock Connect was launched on Nov. 17, 2014, northbound trading exhausted its entire daily quota of 13 billion yuan around 2 p.m. On April 8, 2015, southbound trading reached its cap and used the daily quota just after 2 p.m. The trading system then only allowed investors to sell but not to buy shocks.
Moreover, individual stocks also suspended the purchase of their stocks as the foreign holdings in the company exceed the caps. On May 19, the Shanghai-Hong Kong Stock Connect suspended the purchase of the stocks of Shanghai International Airport Co., Ltd. (600009.SH) as the foreign holdings accounted for over 28 percent of the company’s total shares, and resumed to accept bid until the foreign holdings fell above 26 percent on June 9.
Over the past year, both the southbound trading and northbound trading have been active. Neither of them was gloomy or overheated as the market had worried before. The difference between the net buying in northbound trading and that in southbound trading is less than 30 billion yuan. That suggests that only less than 30 billion yuan cross-border fund has been settled over the year under the program which is designed to balance cross-border capital flows.
In fact, the Shanghai-Hong Kong Stock Connect has also delivered a satisfying result in terms of its stability and safety.
Charles Li once said in an exclusive interview with SSN that the Shanghai-Hong Kong Stock Connect was like a closed yet transparent glass box which clearly displays all information, such as how much money flow in or out, who are the buyers, which stocks investors have bought and at what prices they buy or sell their stocks. Once investors sell their stocks, the money would flow back through the channel where it flows out. Therefore, the link is under transparent regulation and its risk is controllable.
Except the safe and controllable cross-border capital flow, the Shanghai-Hong Kong Stock Connect has performed well in trading operations over the past year. It successfully weathered the storm of the market volatility in China and around the world in this summer.
Facilitate A shares in integrating with international capital market
Thanks to the efforts made by the regulators and stock exchanges to popularize and improve the Shanghai-Hong Kong Stock Connect, international investors have a clearer picture of the opening-up channels of the A-share market and pays more attention to the A-share market, and overseas market have more knowledge about Chinese companies.
The Shanghai-Hong Kong Stock Connect is part of China’s broader plan on two-way opening-up of its capital market. Its success has pointed a clearer way for Chinese capital market to integrate with the international market. There are more and more positive feedbacks from overseas. More and more overseas investors hope to participate in A shares. Internationally-known index companies have also put the inclusion of A shares in their global market index on their agenda.
In this May, world famous index company FTSE Group announced the start of its transition to include China A shares in its transitional global benchmark with the launch of two transitional indexes for emerging markets. The initial weighting in the transitional indexes is around 5 percent and increased to 32 percent when international investors can gain full access to A-share market.
Another world-famous index company Morgan Stanley Capital International (MSCI) announced in June that it would not include A share in its Emerging Markets Index temporarily but keep it in the list of 2016 MSCI Emerging Markets Index assessment and claimed that it would be included in the index once the market access problem of A share is solved.
Deutsche Bank previously pointed out in its research report that the MSCI Emerging Markets Index requires its component stocks to meet the three following requirements. It should be highly open to foreign capital and capital’s cross-border circulation, and it needs a high-efficiency operation system and moderately steady system framework. But for right now, the market access problem is key to whether the A shares can be included in MSCI index.
“The open structure created by the Shanghai-Hong Kong Stock Connect provides solution to this problem.” Some people with U.S.-capital funds from Hong Kong expressed that “China, as the world’s second largest economy, has huge demand in the offshore fund globalization allocation. Yet it needs to apply for quota to invest in A-share market, which is very inconvenient for the offshore funds, especially for the passive investment funds. Although there are restrictions in quota and investment coverage for the Shanghai-Hong Kong Stock Connect, the quota is under control and the quota amount and investment objects can be expanded in the future, which makes it possible for funds to invest in A shares.”
“If the Shenzhen-Hong Kong stock connect is launched, the barriers preventing the A shares from being included in MSCI Emerging Markets Index will be fewer and fewer.” said Charles Li.
The Shenzhen-Hong Kong Stock Connect which has drawn the attention of overseas market has been poised. After the Shanghai-Hong Kong Stock Connect was successfully introduced, Premier Li Keqiang stated in his inspection in Shenzhen on January 5 this year that there should be Shenzhen-Hong Kong Stock Connect following the Shanghai-Hong Kong Stock Connect. The project design and technology development for the Shenzhen-Hong Kong Stock Connect have been finished after months of preparation. Everything is ready and just waits for the central government’s signal.
The Shenzhen-Hong Kong Stock Connect will include some typical stock objects on the Main Board, SME Board and ChiNext Board, which offers more investment options for overseas investors and also lets the world realize that China has powerful manufacturing industry and financial enterprises, as well as many excellent listed companies with technological innovation.
In fact, the interconnected investment category will be extended to the stocks on Shenzhen Stock Exchange in the future, and the Shanghai-Hong Kong Stock Connect is being optimized and improved all the time.
The securities regulatory commissions and stock exchanges from Shanghai and Hong Kong presented many road shows in several cities of North America, Europe and Middle East regions and introduced the Shanghai-Hong Kong Stock Connect program to large institutional investors in the past year. The HKEx launched central tracking system on March 30. The system is able to meet the monitoring requirement when investors do not transfer the A shares from hosting providers to securities brokers before selling them, which greatly stimulates the overseas capitals to make long-term investment in the Shanghai-Hong Kong Stock Connect.
The problem of A-share nominal holders in Shanghai-Hong Kong Stock Connect, which troubled the overseas investors a lot, was also tackled last year. Hong Kong Securities Clearing Company Limited (HKSCC) revised the General Rules of Central Clearing and Settlement System (CCASS), which allows the HKSCC to provide documents certifying the investors hold the A shares under the investors’ request and to assist them in taking legal actions in mainland China when necessarily so as to free the overseas institutional investors (especially funds from the U.S. and Europe) from concerns on participating in the Northbound Trading of the Shanghai-Hong Kong Stock Connect.
We are very glad to see that regulators and stock exchanges make effort to popularize and improve the Shanghai-Hong Kong Stock Connect, making the international investors become clear about opening path of A-share market, attracting more attention of overseas market to A shares, and deepening international market’s awareness on Chinese enterprises. Last week, MSCI included 14 Chinese concept stocks into its China index and emerging market index for the first time.
This is the butterfly effect from successful implementation of the Shanghai-Hong Kong Stock Connect, proposing new requirements for regulators and stock exchanges of Shanghai and Shenzhen. The two exchanges clearly indicated in anniversary of the program that next step is to continuously promote the “optimization and upgrading of the program”. Huang Hongyuan, the SSE general manager, pointed out that “next step is to jointly optimize and upgrade the program under the support of regulators and industrial players to make it play a deepening role in larger scope”; Charles Li, CEO of HKEx, said that “the program is constantly being improved to prepare for Shenzhen-Hong Kong Stock Connect.”
Welcome a new era of comprehensive interconnection
“The most important is that Shanghai-Hong Kong Stock Connect explores the modes of market, transaction, supervision, clearing and risk control, provides time and space for comprehensive two-way openness of China’s capital market.”
Vote will be carried out soon to determine whether RMB is included into special drawing rights (SDR) of IMF, which will enhance the Shanghai-Hong Kong Stock Connect, and has been frequently mentioned by the media and related experts in recent period. Indeed, Shanghai-Hong Kong Stock Connect is the connectivity for stock market under the macro background that it can also promote internationalization of RMB and cross-border capital flow. China is very decisive to enhance the two-way openness of its capital market and RMB’s internationalization, and successful implementation and popularization of the program will lead a new era of comprehensive connectivity.
The previously-issued planning suggestions of “13th Five-year Plan” clearly propose that China will expand two-way openness of financial industry in the future, orderly realize convertibility of RMB and capital projects, promote RMB to be included into SDR, make the RMB become a convertible currency; China will also ease the restrictions on exchange settlement of overseas investment, meanwhile, enhance the two-way openness of capital market, and gradually release or even cancel the restrictions on domestic and overseas investment quota.
“The most important is that Shanghai-Hong Kong Stock Connect explores the modes of market, transaction, supervision, clearing and risk control, provides time and space for comprehensive two-way openness of China’s capital market.” Charles Li also said, “Overseas capital flow is RMB, therefore, Shanghai-Hong Kong Stock Connect program is a new accelerator for RMB’s internationalization.”
It is more crucial that such mode can be copied.
SSE, China Financial Futures Exchange and Deutsche Boerse AG signed an agreement on October 29 to establish a joint venture, China Europe International Exchange AG (CEINEX), with headquarter in Frankfurt, Germany. SSE chairman Gui Minjie will take up the post of the first chairman of board of supervisors. It may be intentional or just coincident that first batch of spot products of the CEINEX are likely to be listed on Frankfurt market on Nov. 18, which is just after the anniversary of Shanghai-Hong Kong Stock Connect program. The same as the program, these products will be valued and settled with RMB.
In addition, Shanghai Stock Exchange and London Stock Exchange also conducted feasibility study on the connection of the two markets. Huang Yuanhong revealed that many overseas stock exchanges are proactively seeking in-depth cooperation with the mainland market. Inspired by Shanghai-Hong Kong Stock Connect, participants in the market expected that in the next stage Shanghai and New York, Shanghai and Singapore are likely to be linked, and in the end the Chinese market will become an integral part of the global market.
Significantly, the preparation of London-Hong Kong connect scheme, the prelude of a commodity link between China and international market, is underway. London-Hong Kong connect, which called by Charles Li the “westbound connect”, is a mechanism bridging commodities markets in the two territories. Soon after the successful implementation of this trading program, Hong Kong will move eastward to negotiate commodity link with China.
Charles Li said, “As a significant breakthrough for investment into and out of China, Shanghai-Hong Kong Stock Connect offers a ‘Mutual Market’ jointly operated by two exchanges and jointly overseen by two regulators, and enables investors from both sides to realize complete market-oriented link and investment according to their respective rules.”
Analysts pointed out that as a pioneer program, the Shanghai-Hong Kong Stock Connect provides experience for future opening projects, such as how to deal with technological difficulties, including the differences between trading infrastructure, clearing system, regulatory frame and even exchange rate management of the two markets. In this regard, Shanghai-Hong Kong Stock Connect is an amazing design for the two-way opening of capital markets.
Shanghai-Hong Kong Stock Connect has operated smoothly and safely over the past year. It has not only explored a practical way for the opening of capital market, but also given a growth platform for mainland institutional and individual investors and listed companies, and laid a solid foundation for its own complete connection in the future.
For mainland institutional and individual investors, the launch of Shanghai-Hong Kong Stock Connect does not simply add one more “Hong Kong stocks” option in the assets classes, but also bring the collision of investment philosophy. As investors in Hong Kong securities market come from all over the world, including the world’s top institutional investors, mainland investors get the chance to compete with the strongest rivals. This is a meaningful warm-up for their future assets allocation around the globe.
Following the launch of Shanghai-Hong Kong Stock Connect, many Hong Kong investors become participants of A share market. As most of them are institutional investors pursing long-term investment income, they tend to actively involved in corporate governance and demand reasonable and continuous earnings. This on the one hand requires A share market listed companies to improve corporate governance, transparency in information disclosure and dividend yields, on the hand paves the way for such companies to gain international visibility and expand into global market.
All in all, the era of relatively closed market is ended, and Shanghai-Hong Kong Stock Connect has opened a new chapter in the comprehensive interconnection of global capital market. With the experience from the Shanghai-Hong Kong Stock Connect, the opening of China’s capital market will go further, and contribute continuous power for the country’s economic transformation and upgrading and financial market reform.