China: Stock Connect through train steams ahead

By:
Rob Hartley
Published on:

The eagerly awaited Stock Connect system connecting Hong Kong to the mainland is up and running to relief all round. While traditional long-only funds and southbound flows have lagged, market players foresee a new dawn in Chinese equity trading.

The Shanghai-Hong Kong Stock Connect system has sailed through a successful launch to mark the start of a much-anticipated new era in Chinese equity trading.

The system had been subject to minor delays in the past few weeks, but any criticisms were forgotten when trading finally got under way on Monday. The Stock Connect increases ties between the Shanghai Stock Exchange (SSE) and the Hong Kong Stock Exchange (HKEx) by allowing trade in both directions through mutual market access.

Rakesh Patel-large
  Stock Connect is here
and the first day has been a triumph. This is an historic opportunity for investors everywhere

Rakesh Patel

"Hong Kong has the combined advantages of one country and two systems," said Hong Kong SAR chief executive CY Leung at the launch. "We also offer the unique feature of being part of China and yet outside the mainland. We are therefore the super-connector between the rest of the country and the rest of the world.

"Stock Connect aligns the mainland market with the international markets and is the upgraded version of Hong Kong as the super-connector to and from China."

The chance to gain increased exposure to Chinese companies is something that has been eagerly awaited by many in the investment community, with banks working for months in preparation for the launch of the Stock Connect. And the simplicity of the Stock Connect system for those trading into China has created a strong amount of enthusiasm among investors.

"Stock Connect is here and the first day has been a triumph," says Rakesh Patel, co-head of equities, Asia Pacific, at HSBC. "This is an historic opportunity for investors everywhere, and many of our institutional and retail clients took advantage on the first day.

"HSBC is determined to lead the way in bringing our investor clients the benefits of China’s moves to open up its domestic markets, so our traders, salespeople and operations staff worked through the weekend to ensure that everything was ready today."

Northbound emphasis

The trading itself on the first day is understood to have had more emphasis on the northbound highway than on the southbound channel, with a variety of different investors utilizing the system.

Kevin Rideout, head of wholesale execution services, Asia, at Citi, tells Euromoney: "Day one of the Stock Connect was all very orderly northbound. There was a higher skew to the open as we expected, with 24% of volume versus a norm of 13% for the last month completed by 9:45am.

"We executed, cleared and settled trades for all client segments, long only, hedge, private banks and retail from all major geographies. Clients traded across all execution channels, cash electronic, high touch and PT as well as synthetic. The quota northbound probably lasted a little longer than we might have expected and southbound was lighter than widely expected."

However, there were still signs that certain types of investors were more willing to get involved in the Stock Connect at the early stage, although that is expected to change.

Nick Ronalds, managing director and head of equities at the Asia Securities Industry and Financial Markets Association, explains: "Market intelligence confirmed expectations that retail and hedge fund traders would make up the bulk of the volume because traditional long-only funds would be hanging back because of unresolved concerns, such as the pre-delivery requirement and some legal/regulatory issues.

"The good news is that once those concerns are addressed over coming months, Stock Connect will see substantial further growth."

Further reading
Chow Chung-kong-large
China: IPOs in line for a
ticket on the through train

The support in the market for further growth of the Stock Connect system is substantial as the investment community anticipates a huge opportunity in the easing of restrictions on the Chinese capital markets.

"Overall, the northbound programme was a success and represents a key step in the opening of the Chinese capital markets," says Will Stephens, Deutsche Bank Asia head of derivatives.

"This dramatically improves the likelihood of A-shares being included in global benchmark indices. Southbound flow was modest, but this remains a medium-to-longer-term story and were encouraged by strength we saw in select mid-cap names."

Aside from the improved trading aspects, the Stock Connect could also boost listings on the SSE and the HKEx, Euromoney previously reported. And the convergence of valuations for dual-listed stocks is a further expected consequence of the move.

"This is a long-term scheme and its success will be measured in years, not days or weeks," adds HKEx chief executive Charles Li. "The immediate achievement is the infrastructure itself, which connects such vastly different and disparate markets and systems.

"The regulators, exchanges and clearing houses on both sides of the boundary have worked extremely hard over the last seven months to make today a reality. I want to thank everyone in the market for their support and I look forward to being on this journey for a long time."

Many in the market will be relieved that the new system is finally in place after months of speculation and preparation. While the pace of future development is unknown, the high public backing from the Chinese authorities, and hospitable market reception, suggests optimism ahead.