The world's third-largest stock exchange with
US$5.6tn market capitalisation, giving investors unprecedented
access to the world's largest consumer market? It could happen,
thanks to Shanghai-Hong Kong Stock Connect.
Amid the hustle and bustle of the
26th APEC Summit in Beijing, the Chinese government finally
granted the green light to a long-awaited plan to connect the Hong
Kong and Shanghai stock exchanges.
The Shanghai-Hong Kong Stock Connect opened this week, allowinig
a daily quota of US$3.8bn in cross-border purchases by investors
operating through both exchanges.
Before this, only a handful of fund managers were allow to trade
Shanghai 'A' shares under a quota system capped at a total
of US$105bn. Since Hong Kong's capital markets are opened to
any foreign investor with a local brokerage account, the average
retail investor around the world can now buy into any of the 568
companies listed in the Shanghai Stock Exchange with the
For foreign investors, access to Shanghai 'A' shares
also means buying into the potential success of a
China economic revival, with the Chinese government vowing to
boost the domestic consumption of its 1.355bn population to reduce
dependence on exports and infrastructure spending.
Likewise, Chinese investors will be able to access the
'H' shares listed on the well-respected Hong Kong Stock
Exchange (which operates under stringent and transparent
regulations) for the first time. This is likely to boost Chinese
households' confidence in equity investment and influence their
asset allocation decisions. It would encourage them to re-allocate
their financial assets from cash deposits to equity investments in
the Hong Kong market.
By international standards, Chinese mainland households are
still deeply under-invested in the equity market; only 12% of their
US$10.6tn financial assets are invested in securities with 64%
sitting in cash deposits with negative yields in real terms. On the
contrary, US households park 44% of their financial assets in
securities with only 16% in deposits.
Since the announcement of the exchange connection in April, the
Shanghai Composite has risen 14.8% while the Hang Seng Index has
gained 3.1% with the main beneficiary being the city's stock
exchange operator (Hong Kong Exchanges and Clearing Limited) which
soared to 34.1%. According to BNP Paribas, the linkage could boost
the average daily value of stock trading in
Hong Kong by about 38% by 2015.
The exchange link is a significant step in China's ongoing
financial and economic reforms. It looks to accelerate capital
account liberalisation, promote international use of its tightly
controlled renminbi and elevate Shanghai's position as a global
financial hub. The collaborative mechanism will likely drive up the
value and volume of both markets while enhancing competitiveness
and efficiency. The linkage may eventually lead to the creation of
the world's third largest stock exchange (after the New York
Stock Exchange and NASDAQ OMX) with US$5.6tn single market
capitalization, overtaking Tokyo and London.
But it's not all about
China. The position of Hong Kong as an offshore renminbi centre
will be strengthened by the linkage as it allows their mainland
counterpart to invest directly in the local stock market using
renminbi. US.-based brokers Jefferies Group went as far as telling
its clients that the linkage is putting Hong Kong "at the
forefront of the largest capital account opening of a country since
WWII". This development reaffirmed Hong Kong's position as
the facilitator of China's financial integration with the
global market as the mainland financial markets are not mature
enough for full liberalisation.
While the linkage might be a milestone in China's financial
liberation, differences of regulatory environments in both markets
require further consolidation when it comes to actual execution.
For example, the imposition of 10% capital gains tax on
non-resident equity investors in China is not applicable in
Also, Chinese investors are required to hold the stocks in their
accounts on the trading day but its Hong Kong counterparts only
need to transfer the stocks two days after they sell.
The Shanghai-Hong Kong Stock Connect is only the first step in
integrating China's major stock exchange with the global
market. Hong Kong Exchanges and Clearing Limited's CEO Charles Li hinted that a linkage with
China's second largest stock exchange, the Shenzhen Stock
Exchange, is in the pipeline. If the linkage were expanded to
Shenzhen, China's combined exchanges would form the biggest
stock market in the world outside of the US.
China might be losing its edge as the "world's factory
floor" but it could be well on its way to become the
"world's trading floor".
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
As a destination for foreign investors, India is fast closing the gap on China to become the world's most popular investment hub. Figures released by the country's Reserve Bank in August 2008 showed that foreign direct investment in India for the first quarter of this financial year exceeded the total received in 2005/06.
Developing Asia is facing considerable headwinds. Delayed recovery in major industrial economies and moderating prospects for the large economies of the China and India weigh on region's project growth forecasts.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).