China trading-scheme mergers expected to move slowly

China’s rapid pace of liberalisation over the past six months surprised market observers, a forum hears. However, they do not expect the channels for foreign investment to merge at a similar speed.
China trading-scheme mergers expected to move slowly

China is unlikely to merge its cross-border investment channels within too short a period of time, market observers told a forum.

Liberalisation has been accelerating in recent months, which has led to predictions that an array of entry points for foreign investors may be integrated into each other.

But speakers said they expected expansion of the existing cross-border trading schemes to continue over the next 12 months.

Jonathan Ha, chief executive of Red Pulse, a Shanghai-based market intelligence platform, said that the pace of change in recent months had surprised the market.

“All the things that have happened in the last six months were almost a shock to us, in terms of how quickly it has moved along,” Ha told the FIX Asia Pacific Trading Summit in Hong Kong last Thursday. “We don’t think [market liberalisation] is taking too long; on the contrary perhaps it is right on schedule, and it is even possibly a surprise that things [have happened] so quickly and well.”

After the Shanghai-Hong Kong Stock Connect was launched last November, China has continued to open up through the reform and expansion of various cross-border schemes, including growth of both QDLP (qualified domestic limited partnership) and QDIE (qualified domestic investment enterprise) for alternatives, as well as tax clarification and quota expansion of both QFII (qualified foreign institutional investor) and its renminbi-denominated equivalent scheme.

Ha expected further expansion of these cross-border programmes over the next 12 months. Benedict Cheng, Asia-Pacific chief operating officer and managing consultant at GreySpark Partners, said he expected further reform of the bond market because Beijing aimed to reduce corporates’ reliance on bank loans and equity issuance for financing needs.

Market participants such as UBS are expecting an extension of Stock Connect between Shenzhen and Hong Kong to be announced this month, while Shanghai-based Z-Ben Advisors anticipates the new link will go live in the fourth quarter of this year. The cross-border trading link has received the green light from the State Council but is waiting for a joint announcement from the Hong Kong and Shenzhen bourses, reported local media citing anonymous sources.

Market participants at the FIX forum said these controlled channels are not likely to converge in a short period of time because China’s policymakers are plotting a steady liberalisation path.

“This is actually a well thought-out plan that has been developed over time by regulators and policymakers,” said Ha. “They want to slowly roll out these plans bit by bit, and set up access channels separately for equity, bond markets and alternatives.”

“It is easier to manage these channels separately rather than together from the get-go. Once the regulators make sure these channels are going right on their own, they will start looking at how to converge.”

“If you take a perspective that the ultimate [aim] in China is to liberalise its currency and become convertible, all these capital market opening pieces are just part of it,” said a senior executive at a global index provider. “It depends on your view [as to] when will the currency be convertible; I think there are a few more years [before seeing] the currency fully convertible.”

Cheng added: “I think the convergence will take place at some stage, but obviously we are not there yet, mainly from a legal and operations framework perspective.”

While China is expanding channels providing access to its capital markets, the long-awaited mutual recognition scheme with Hong Kong has become the market’s second priority.

“Imagine if Stock Connect and mutual recognition launched together and overlapped each other, that would be quite a difficult situation to handle,” said Ha. He does not see it being delayed, but believes policymakers would like to let Stock Connect have a solid market reception in order to build liquidity, understanding and confidence, before moving on to mutual recognition.

“I am not too optimistic that it will happen this year,” said the index provider executive. “Mutual recognition is more about facilitating the mutual fund business in China to Hong Kong or Hong Kong to China. In the grand scheme of markets opening up, it is an important part but not the most essential part at the moment.”

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