China: IPOs in line for a ticket on the through train
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China: IPOs in line for a ticket on the through train

New system connects Shanghai and HK markets; regulations need to catch up.

Chow Chung-kong-envelope
Hong Kong Exchanges & Clearing chairman Chow Chung-kong makes a statement on the establishment of the Shanghai-Hong Kong stock market link at the Hong Kong Stock Exchange

The new Shanghai-Hong Kong Stock Connect system could boost listings in both financial centres, according to bankers in the region.

The much-anticipated through train, as it is locally known, will increase ties between the Shanghai Stock Exchange and the Hong Kong Stock Exchange by allowing trade in both directions through mutual market access. The connectivity mechanism is yet to launch, but bankers already predict certain indirect effects that may result once it is up and running.

It could attract additional listings to both Hong Kong and Shanghai as the new initiative matures, as bankers say the trading highway could open the door to listings by large foreign companies in Shanghai and attract more Chinese companies on to the Hong Kong bourse.


“A few years ago there was a lot of interest from international companies seeking listings in China,” says one ECM banker. “It was a way to raise capital… and show a bit of face in China. From the issuers’ standpoint, it made sense, but from the regulatory standpoint, it was a time when there were a lot of scandals, so that put off investors. I’m just wondering how Stock Connect is being integrated into the thought process and to what extent [it] could help advance the aim of international companies to list in China.”

Nick Ronalds-large
Concerns that Stock Connect might rob liquidity from Hong Kong and shift it to Shanghai, or vice versa, don’t find much support from historical experience

Nick Ronalds

Stock Connect could also trigger benefits for the Stock Exchange of Hong Kong, according to bankers, potentially pushing some of the backed-up Chinese IPOs south to the former British colony, though changes in the regulatory regime would be needed beforehand. “If they made it easy to go from Shanghai to Hong Kong, I don’t see why they would not do it,” says a second ECM banker. “We are waiting for clarification on how IPOs will be treated.”

Policy and regulation around IPOs will be an important factor in determining whether Stock Connect succeeds in shaking up the IPO market, but some believe there would need to be changes for that to happen.

“Stock Connect is not an answer for the time being for the overhang in potential IPOs in China because such a step would require not only major policy decisions in Beijing but a new round of negotiations between Beijing and Hong Kong,” says Nick Ronalds, managing director and head of equities at the Asia Securities Industry and Financial Markets Association.

Aside from the ECM implications, several bankers told Euromoney that one effect of the introduction of Stock Connect could be the convergence of valuations for stocks that are dual-listed in Hong Kong and Shanghai. “One thing is for the dual-listed stocks and whether the trading gap narrows,” says a third ECM banker. “There is some arbitrage at the moment.”

He adds: “It’s going to take some time to see how it really pans out regarding flows. Our hope is for more money to be channelled into the Hong Kong market from China.”

No fear

According to Ronalds, there is little reason to fear negative effects on liquidity, as it may even be boosted by Stock Connect. “Concerns that Stock Connect might rob liquidity from Hong Kong and shift it to Shanghai, or vice versa, don’t find much support from historical experience,” he says. “More typically, the availability of new but kindred securities in a related market results in a net increase in trading as investors and traders rebalance portfolios to get more diversification.”

Ronalds says Stock Connect will enable offshore investors to increase their China exposure, not because they want to substitute mainland stocks for Hong Kong stocks, but because Stock Connect will make it more feasible to increase exposure to China in line with its economic importance. “Another strategy additive to volume for both sides are spread opportunities such as long-short strategies between HKEx and Shanghai shares not previously available,” he says.

Stock Connect was announced on April 10 and is set for launch in mid-October. While all Hong Kong and overseas investors will be allowed to trade northbound through it, only mainland institutional investors and individual investors who hold an aggregate balance of not less than Rmb500,000 ($64,500) in their securities and cash accounts will be accepted to trade southbound, according to Hong Kong Exchanges and Clearing.

Initially, Stock Connect trading will be subject to a maximum aggregate quota, also known as a cross-boundary investment quota. It will also be subject to a daily quota. The aggregate quota puts a cap on absolute fund outflows from the mainland under the southbound channel and the absolute amount of fund inflows into the mainland through the northbound section.

The southbound aggregate quota will be Rmb250 billion and the northbound aggregate quota will be Rmb300 billion. The Stock Connect daily quota will be used to limit the maximum net buy value of cross-boundary trades. The southbound daily quota will be Rmb10.5 billion and the northbound daily quota will be Rmb13 billion.

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