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HKEx: Despite a wild ride, the Connect has been mainly successful

Nearly one year after launch, the Stock Connect has largely been a success in terms of what regulators set out to do, though much more needs to be done, according to Tae Yoo, head of client business development in the global markets division for the Hong Kong Stock Exchange.

Despite the recent volatility in the mainland markets, in Hong Kong, capital is not coming out or going in, just staying on sidelines, said Yoo, speaking at the Thomson Reuters Pan-Asian Regulatory Summit in Hong Kong.

“Money has not left the market in Hong Kong. New money hasn’t come in with market conditions the way they were. And with new [mainland] regulations coming in, it’s obvious mainland investors also decided to sit on sidelines.”

Hong Kong still plans a stock market linkage with the Shenzhen exchange, though he did not provide a date. “If and when regulators are able to announce the launch date, we are confident of a smooth transition and the markets will adapt quickly.”

In addition, regulators from the London Stock Exchange did a feasibility study on a stock connect with Hong Kong. Yoo wouldn’t comment on a London connect, other than to say “regulators from London know a lot about the difference between the A-share and Hong Kong markets” after studying the scheme.

He did say that the six-hour time difference between the UK and Hong Kong presents a set of unique difficulties.

Based on the experience of connecting Hong Kong and Shanghai, the model replicable, he said. But certain features have to be in place. One, the markets to be linked have to be dislocated somehow. 

“Whether it’s capital flow, order flow or clearing and settlement flow, there has to be inefficiency in either market.”

Second, market demand from both sides has to exist.

He said discussions about Singapore and Taiwan linking their stock markets depends on feasibility.

“Anyone can open up a securities account with a broker here to access Singapore and Taiwan, why do you really need another model? Unless it’s economically feasible, or it’s somehow more efficiently accessing the market. Otherwise one has to look very clear to see if it’s bringing value.”

Market changing effects

Among recent developments, the Connect has approved Luxembourg UCITS and Dublin UCITS, and questions around beneficial ownership of China A-shares have been answered in an FAQ by China’s regulator, the CSRC.

Further enhancements are in the pipeline. For example, regulators are working on ways to smooth the path for overseas institutional investors to deal with settlement issues in the A-share market.

The Stock Connect is also “highly interested in expanding to other asset classes” Yoo said, mentioning discussion about a bond connect.

He said the Connect has had some market changing impact.

“For southbound investments — Chinese investors into Hong Kong — they take RMB through a broker in China, bring it into Hong Kong and settle in Hong Kong dollars. This is the first time ever RMB has been converted into Hong Kong dollars by retail investors.”

For investors going north into China, offshore RMB is invested into the A-share market without any restrictions on eligibility. A dentist in Korea, for example, could invest into China’s A-share market after converting Korean Won, he said.

“These are major steps toward RMB internationalisation.”

Part of the Mark Allen Group.