Rossana Chu (Managing Partner)
On 2 September 2022, at the Annual Forum of the China International Fair for Trade in Services, Dr. Fang Xinghai, Vice Chairman of the China Securities Regulatory Commission (CSRC), indicated that the CSRC will work with Hong Kong’s relevant authorities to launch three new initiatives to expand the connectivity of the mainland and Hong Kong capital markets.1
EXPAND ELIGIBLE STOCKS FOR THE STOCK CONNECT
First, the CSRC will include more Hong Kong primary-listed foreign companies and more companies listed on the Shanghai and Shenzhen exchanges as eligible stocks for the Stock Connect program.
Mr. Paul Chan, the Financial Secretary of the Hong Kong government, welcomes this initiative.2 Allowing mainland investors to invest in more Hong Kong listed stocks would help enhance the liquidity and valuation of those stocks and would attract quality enterprises to list in Hong Kong, thus enhancing the competitiveness and uniqueness of Hong Kong as an international financial centre. It may also further open up the mainland financial market in a manner that manages exchange rate risks.
RENMINBI STOCK TRADING COUNTERS IN HONG KONG
Second, the CSRC and relevant authorities of Hong Kong will study the introduction of more Renminbi securities trading counters under the southbound trading of the Stock Connect. This initiative will increase the choice of Renminbi investment instruments in Hong Kong and reduce exchange risks and costs for mainland investors at the same time. To actualize a deeper implication of this proposal, Renminbi securities trading in Hong Kong is conducive to deepen the liquidity and depth of the offshore Renminbi market, thus speeding up the internationalization of Renminbi as a currency of making investments and accumulating wealth outside the mainland.
MAINLAND TREASURY BOND FUTURES IN HONG KONG
Third, the CSRC will support the issuance of mainland government bond futures in Hong Kong and boost the two-way opening-up of the mainland treasury bond futures market. This initiative will introduce an effective risk management tool for investment in treasury bonds through channels such as the "Bond Connect". Together with the "Swap Connect" announced earlier, this will enable foreign investors to hedge against the risk of interest rate fluctuations on Renminbi assets.
In practice, the liquidity of the two government bond markets can be enhanced and the bid-ask spreads may be reduced. The increased international participation in the mainland treasury bonds will also accelerate the internationalization of Renminbi as well as the development of Hong Kong as an offshore Renminbi hub and a risk management centre.
CURRENT FINANCIAL MARKET CONNECTIVITY MECHANISMS
At present, the financial market connectivity mechanisms between the mainland and Hong Kong mainly comprise the "Stock Connect", the "Bond Connect", the "Cross-boundary Wealth Management Connect" and the "Swap Connect".
The Shanghai-Hong Kong Stock Connect was launched in November 2014, providing a two-way trading link between the Shanghai Stock Exchange and the Hong Kong Stock Exchange in respect of eligible stocks. Following the success of the Shanghai Connect, Shenzhen-Hong Kong Stock Connect was launched in December 2016 by and large applying similar principles and arrangements as in the Shanghai Connect. Stock Connect enables mainland and Hong Kong investors to trade stocks listed on the other exchange through local securities brokers within prescribed limits.
The Bond Connect allows investors from the mainland and overseas to trade in each other's bond markets through a market infrastructure linkage in Hong Kong. Northbound trading commenced in July 2017, offering international investors the access to the China Interbank Bond Market. Southbound trading was launched in September 2021, providing an efficient channel for mainland institutional investors to invest in offshore bonds… READ FULL ARTICLE