Launched in November, the Stock Connect, also known as the “through train”, links the Shanghai and Hong Kong stock exchanges.
So far, the response to the cross-border opportunity among asset managers has been tepid.
The industry body said currently only 13 firms out of the 41 respondents have invested through the Stock Connect. Furthermore, the usage has not been extensive and is primarily limited to Hong Kong-domiciled funds, unauthorised funds, own accounts or other institutional mandates.
However, the industry association said it is “very positive” about the potential going forward. Nearly 53% of the surveyed firms indicated that they plan to use the Stock Connect within the next 12 months.
Within this cohort, 86% plan to do so within the next six months.
The rest (47%) also expressed interest, but decisions would be subject to receiving necessary accords from the depositary banks and/or the clients.
Stock Connect vs QFII, RQFII
One-third of the respondents said the Stock Connect would not reduce the attractiveness of the Renminbi Qualified Foreign Institutional Investor and Qualified Foreign Institutional Investor licenses, the other two avenues providing foreign asset managers access to the China markets.
However, a majority (65%) thought it was difficult to comment on the question at this stage.
A majority (68%) also believe that each of the three avenues have their own merits, and can be used to serve different client segments.
Recently, Principal Global Investors said the best vehicle for institutional investors to tap onshore equities would be through an asset manager who holds an RQFII licence because, “Most institutional investors will find accessing A-shares on their own a daunting task with significant logistical hurdles.”
Currently, the mainland stocks eligible on the Stock Connect include all companies listed on the Shanghai Stock Exchange 180 and 380 indices.
“On a medium and longer term basis, investment managers believe that to further enhance the effectiveness of Stock Connect, it would be important to expand the investable universe (including but not limited to adding non-index stocks, stocks listed on the Shenzhen stock exchange as well as fixed income instruments) as well as to further relax a number of the operational and investment restrictions,” said Bruno Lee, chairman of HKIFA.
Principal Global Investors and BlackRock’s Helen Zhu, head of China equities, earlier echoed similar views.
On Monday, Chinese Premier Li Keqiang flagged the idea of establishing a stock trading linkage between Hong Kong and Shenzhen.
Concerns prevail
Almost all respondents in the survey said the Stock Connect still has key technical and legal issues that need to be resolved.
“Due to a number of legal and technical issues, many traditional long-only managers which are keen to make use of this channel for authorised and other regulated funds, pension mandates and other institutional mandates, have not been able to leverage it,” Lee said.
“However, as the issues are resolved steadfastly, we are confident that the level of usage will be able to enjoy steady and robust growth,” he added.
The top three issues identified are beneficial ownership, pre-trade checking, disclosure of interest and the short swing profits rule.
In September, Schroders highlighted some of the issues, which include clarity on treatment of the capital gains tax, the exercise of rights in A-share companies, differing settlement cycles between Hong Kong and Shanghai and the limitation of daily quotas.
HKIFA conducted the survey of 41 fund houses during November-December. These funds houses are primarily global asset management companies, which manage regulated funds and pensions, as well as other institutional mandates. In October, their total combined assets were $20trn.
