The benefits of Stock Connect’s infrastructure means the scheme could survive even if China’s financial markets become fully liberalised, a senior official at Hong Kong's stock exchange said.
Romnesh Lamba, co-head of the global markets division at Hong Kong Exchanges and Clearing, noted the city’s first-mover advantage to provide direct trading in A-shares could mean investors become entrenched in Stock Connect, even if foreign investors were able trade directly in future.
Investors tapping Shanghai stocks via Hong Kong already benefit from China's liquidity pool. Order routing goes directly to Shanghai, with the cost being the same or even lower than on the mainland.
And the closed-loop design of the system means assets invested into Shanghai-listed stocks will remain in Hong Kong, with the clearing and settlement also done in the city. As a result, assets in Hong Kong will be protected by the city’s rule of law.
“I hope that [trading into China via the scheme] becomes entrenched and quite difficult to unwind – certainly difficult to unwind overnight,” said Lamba at Hong Kong’s Asian Financial Forum this week.
While several stock exchanges have struck deals with peers to cross-trade shares abroad, Lamba warned that such schemes only worked in certain cases, such as between Hong Kong and mainland China, when one market is open and the other closed.
Stock Connect, for example, enables China to internationalise its capital market, while having little impact on its capital account, money supply or currency flows.
“This kind of arrangement is not going to work in markets that are completely open. If you're able to access liquidity directly, there's no reason to take a roundabout route to get there,” Lamba said.
Many bourses have or are looking to sign cross-border deals, notablt the Singapore exchange with peers from Taiwan to London.
The forum's panel also heard discussion on the relative lack of flows between Hong Kong and Shanghai. Since its November 17 start, trading has been slow, with 27% of the Rmb300 billion northbound aggregate quota being used as of January 9. The equivalent figure for trade originating from mainland investors buying Hong Kong-listed stocks was 6%.
The reasons have been well document, with fund managers still having trouble over issues such as pre-trade delivery and beneficial ownership.
Reception from the hedge fund community has been more positive, with operational issues such as pre-trade delivery already resolved, given that custodial services of hedge funds are often handled by prime brokers.
But Philip Tye, chairman of the Alternative Investment Management Association in Hong Kong, noted large North American hedge funds have yet to participate in the stocks link, potentially because the scheme being launched at the end of last year, coinciding with a rally in US stocks.
“I think it will be interesting to see when … North American hedge funds start to invest more of their capital into China [this year] and how that will impact the trading volume going forward,” Tye said.
What could really perk up the interest of global investors is the mainland market being included in the MSCI Emerging Markets Index.
Asked whether China could follow in the footsteps of Taiwan, which took nine years of liberalisation before being handed a weighting on the benchmark that better reflected its size, MSCI's head of research Chin Ping Chia remained non-committal.
“I don’t think we can prejudge anything in [that] context … it took a long time to see through that full inclusion and basically we partially included Taiwan in the MSCI index and gradually increased the weight as they relaxed their capital markets,” Chin said.
“I think China is going to experience a very similar type of fashion of inclusion. Personally, I don’t see a big bang in the opening of China in a single day,” he said, adding the direction of incremental policy, while positive, would make China’s full inclusion a multi-year process.