Stock Connect a milestone for mainland-HK ties
Updated: 2014-11-19 09:33
By Albert Lin(HK Edition)
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With the launch of the Shanghai-Hong Kong Stock Connect program, informally known as the "through train", on Monday, Hong Kong and the mainland's stock markets will enjoy an unprecedented level of connection under the first direct Mutual Market Access Scheme (MMAS). Additionally, the integration between mainland financial sectors with their counterparts in Hong Kong will also continue apace. Despite concerns over the "Occupy Central" movement, that initiative was implemented on schedule.
Under MMAS Hong Kong investors will have access to more than 500 stocks representing 90 percent of the Shanghai Stock Exchange's market capitalization through Hong Kong brokers, while investors on the mainland will have access to 266 eligible shares listed on the Hong Kong Stock Exchange through local brokers.
This will be the first time ever that investors on the mainland and Hong Kong will be able to invest directly in each other's stock market. Asset managers, investors, financial speculators in Hong Kong and around the world will be able to enter the mainland's stock market directly with the imposition of minimal investment qualification rules. Investors on the mainland, particularly those individual investors who have long been frustrated by the lackluster performance of the Shanghai index, will have an additional investment destination open to divest their assets into the dynamic but equally challenging stock exchange market here.
Both groups will use RMB as the currency of settlement, which is a milestone for the internationalization of RMB. Data from the first day of trading via the "through train" showed that Hong Kong investors have placed at least 13 billion yuan ($2,12 billion) in A-shares offshore investments. With the successful implementation of the stock "through train" and the accompanying move to scrap the daily limit for the conversion of RMB, the city's position as a key offshore hub for RMB businesses will likely be enhanced.
Unlike previous programs and agreements for cross-boundary investments, the "through train" provides the easiest access for investors to enter the mainland's stock market. In contrast to the Qualified Foreign Investor Institute (QFII) and the Qualified Domestic Institutional Investor (QDII) schemes, wherein only qualified foreign or domestic institutional investors were licensed to invest in the stock markets on the mainland or overseas, the "through train" significantly lifts the barriers for individual investors.
According to published trade rules, despite the broker qualification requirement and the 500,000 yuan trade account balance for individual mainland investors, few other rules will be barriers to qualification. That is to say everyone in Hong Kong is eligible to invest in the A-share market through an eligible broker, while individual investors in China can do the same - provided their trade account balance exceeds 500,000 yuan.
The lifting of the barriers and opening of direct cross-boundary trade will substantially increase the liquidity of the two capital markets. It is also likely to narrow the valuation gap between the two markets. According to the latest estimates, when the upper limit of the 300 billion yuan of northbound investment quota has been reached, it will likely bring in fresh capital equivalent to 1.7 percent of the total capitalization of the Shanghai index.
With the aim of achieving a more sustainable growth model, China is undergoing structural reform away from the previous model underpinned by exports, infrastructure development and real estate boom to a more inward-looking economy focused on domestic demand for goods and services.
Urbanization plans and income promotion plans are the two most widely quoted examples of China's future economic growth engines.
However, without an efficient, open financial system into which unused resources may be aggregated and distributed into the development agendas, the economic transformation of China will either be too difficult, or expensive to implement on such a large scale.
Thus reform of financial markets is a high priority for China's future economic growth. Using RMB will prove an important step in China's overall financial reform plan, this can be done by opening the stock market and attracting foreign investors. By introducing more overseas investors into the A-share market, the concomitant international investment values and standards will also exert a constructive influence upon their domestic counterparts.
The opening of the mainland's stock market and focus on attracting foreign RMB investments marks an important step forward in opening the mainland's capital accounts and provides a sound basis upon which to raise the currency's profile in global investment, in addition to its usage in trade. Hong Kong, being at the forefront of the internationalization of RMB, will see its importance reinforced in bridging mainland capital markets to its foreign counterparts. Seamless integration between mainland and offshore capital markets has shown a positive start through the Shanghai-Hong Kong Stock Connect program, and this is just the beginning.
The author is a seasoned current affairs commentator.
(HK Edition 11/19/2014 page7)