Yesterday China premier Li Keqiang rocked the Shanghai and Hong Kong stock markets by announcing they are now linked – but that is not the only news to come out of the Boao Forum for Asia, where he dropped his bombshell.
The next step for integrating the mainland and Hong Kong's financial markets is to enable mutual recognition of investment products, said Xiao Gang, chairman of the China Securities Regulatory Commission.
He told AsianInvestor that there are no major hurdles left, but that some risks remain. The areas yet to be finalised are how the CSRC will coordinate regulation, especially enforcement, with Hong Kong's Securities and Futures Commission. This is about adding substance to existing memoranda of understanding, he said, and mutual recognition will become a reality "in the near future".
Laura Cha, chairwoman of Hong Kong's Financial Services Development Council, said linking the Shanghai and Hong Kong bourses would breathe new life into the A-share market. As investors in the two cities can now trade on each other's exchange, that will widen the pool of capital available, and encourage new products and services for investors.
One area where she expects to see rapid progress is around renminbi-denominated products. "Our focus is to make the offshore renminbi market deeper and more diverse for retail investors and institutional investors," she said in Mandarin Chinese at the Boao forum.
The next step is to let fund management companies and other financial institutions play a greater role, so that Hong Kong continues to advance the global adoption of the RMB.
She added that Hong Kong, despite its existing status as a leading financial centre, still needs to do more to develop professional money managers and related functions. "We need more international investors in Hong Kong," she said.
Premier Li's "link" means qualified mainland investors can buy stocks in Hong Kong, and vice versa (see story on today's newsletter, QDII2 launched in landmark China opening).
Mutual recognition of funds means funds domiciled worldwide but authorised in Hong Kong can be publicly made available to mainland investors, allowing households in both China and Hong Kong to invest in each other's products. It will also allow global asset managers to sell products into China, via Hong Kong, and to distribute mainland products overseas.
Zhou Xiaochuan, governor of the People's Bank of China (PBoC), added that mainland Chinese investors and companies will give Hong Kong's market scale, while Hong Kong can offer a mature, sophisticated and well regulated environment.
Linking the bourses will further enhance this complimentary relationship; he cited the long queue of mainland companies eager to go public in Shanghai; that pipeline of companies will now be available to Hong Kong traders.
This will attract Chinese household investment, which has stuck mainly to real estate or bank deposits because of widespread distrust of investing in securities, noted Chen Zhiwu, professor of finance at Yale University. But the Hong Kong market will make investing more legitimate, he added, because of its international stature, open nature, rule of law and freedom of speech.
Xiao said mutual recognition may frighten some mainland fund managers, who fear having to go up against global firms using Hong Kong as a conduit to the mainland. But he said this is a good thing: mainland players must now compete – this will force them to improve their performance and their service levels.
PBoC's Zhou added that, at some point, another step will be to increase the daily amount individuals may convert from renminbi to Hong Kong dollars, which is currently limited to Rmb20,000.