The success of the Shanghai-Hong Kong Stock Connect (SHSC) hinges on removing barriers to participation, according to a whitepaper published by Celent and commissioned by The Depository Trust & Clearing Corporation (DTCC).
These barriers include features of the programme that restrict trading strategies, introduce risk and create operational complexity.
Institutional investors continue to cite issues such as limited support for short selling, using Renminbi (RMB) as the sole settlement currency and the hybrid (T+0/T+1) settlement cycle as obstacles to increased usage of SHSC.
According to DTCC, this is compounded by remaining uncertainty over assets, shareholder rights and reporting.
Despite this, the paper noted that the initiative, which is supported by the China Securities Regulatory Commission and Securities and Futures Commission, has achieved significant inroads in the gradual opening up of China’s capital markets to international trading.
Regulators and the Hong Kong and Shanghai stock exchanges are working to resolve these complex issues as well as to address a unique requirement to ‘pre-deliver’ shares for all sell orders.
The paper has explained that improvements in these areas should enable greater participation; pave the way to more A share representation in global equity benchmark indices, which will in turn unleash substantial further investment in A shares longer term; and ultimately open up this significant market to more trading strategies and investors globally.
“We estimate these ‘workarounds’ will drive international holdings of A shares to $428 billion by 2017. Because they are committed to opening China’s capital account, regulators can be expected to expand quotas to meet investor demand,” said Neil Katkov, senior vice president in Celent’s global Asian financial services group.
“Already, a Shenzhen-Hong Kong Stock Connect is slated to start later this year. Observers debate the extent to which this will be followed by links between Shanghai or Shenzhen and Taiwan, Singapore, Tokyo, New York and London.”
Last month, Shanghai Stock Exchange, China Financial Futures Exchange and Deutsche Börse AG agreed on a strategic cooperation to launch a joint venture.
It has the objective to develop and to market financial instruments based on Chinese underlyings to international investors outside mainland China, therefore, products will be offered in RMB.
.jpg)