What is the Shanghai-Hong Kong Stock Connect, and what does it mean for trading in mainland China?
The Shanghai-Hong Kong Stock Connect Initiative is an exciting development. It is part and parcel of how the Chinese are looking to open up two-way capital flows. What the Shanghai-Hong Kong Stock Connect is doing is really cementing for mainland China and Hong Kong the ability to be on each other’s exchanges. So for Hong Kong and overseas investors, it is giving an access point directly through to the $4 trillion market of China-A shares.
It is an exciting development as we’ve gone through the qualified foreign institutional investor (QFII) in 2003, where QFII started to build up and grow and then renminbi (RMB) QFII (RQFII) was launched, a much more flexible regime designed to give asset managers and financial institutions access to the domestic market in China, including A-shares and the broader China inter-bank bond market (CIBM).
Shanghai-Hong Kong Stock Connect is another stage in that evolution of how China is opening up its capital markets. It is quota driven (aggregate quota of $48 billion plus daily quota of $2.1 billion), so there is a limit in terms of how much cross-border trade flows north, how much flows south and how much trades in the day. Effectively, there is a liquidity constraint as well as a total cap on investment. It’s not a panacea; it is not full, unrestricted access, but it is another major step in the right direction of a clearly stated policy for China to open up its capital markets as part of a two-way process.
In China, they are as keen to ensure that the growing mass affluent population can access the global markets as they are to ensure that overseas investors, both institutional and retail, can access China from Hong Kong. They want to ensure that capital account is balanced.
The RMB is a growing currency. With Hong Kong trading predominantly in US dollars, is there a set currency for trade in the initiative?
It will be connected in RMB. The whole process is intent to internationalise the RMB currency. There are stages to this. If you go back to RMB as a trade currency there are increasing policy and trade processes put in place to encourage the use of RMB as an exchange mechanism for trade. Still, a lot of the trade that China has done is in RMB and, as it is the largest trading partner in the world, much more of that is now being settled in RMB.
Historically, you would have traded or exchanged in US dollars. China is very keen to make sure that process changes, and that increasingly more trade is settled in RMB. What you will see as a consequence of that, is the RMB hubs building up around the world—London and Singapore, for example—are having to find a mechanism for that RMB to be invested back in to mainland China, which is what the RQFII was all about. The RQFII was about giving you access to invest in the stock markets and the CIBM in China, through remitting the offshore RMB back to China. All of this are steps on the way to a fully convertible RMB, which we believe will be in the next two or three years.
But it is all part and parcel of a very clear and structured plan for the internationalisation of the currency that will ultimately end up with RMB being a reserve currency, which we’re already seeing to an extent. Central banks and reserve managers around the world are now deploying reserves and having a reserve in RMB. In South Africa, a massive trading nation with China, they have a clear policy around having RMB reserves. Nigeria and Australia are also deploying reserves, and these are commodities countries. In September, the UK Treasury announced it would issue the world’s first non-Chinese sovereign offshore renminbi bond. The proceeds will be used to finance the UK government’s reserves of foreign currency. This further signifies the important trend of RMB as a potential future reserve currency.
We’re also seeing a lot of central banks and reserve managers start to manage RMB reserves and that is the ultimate end-game. As it becomes a fully convertible reserve currency, the level of investment will undoubtedly increase.
You look at China—there is $4 trillion in the A-shares market, $4.5 trillion in the bond market—that is a more than $8 trillion market. The bond market is the third largest bond market in the world, if you include the eurozone as one market.
What will the Shanghai-Hong Kong Stock Connect bring to HSBC?
Access to China is very carefully structured. The Shanghai-Hong Kong Stock Connect is another mechanism, but a really interesting one for HSBC. It is a great opportunity to partner with our colleagues in global markets, because we can offer clients the execution capabilities of the market and then effectively feed that through into the custody of those assets, too. Not many banks will have this combined brokerage and custody capability available to clients ready for the launch.
It’s an exciting time for HSBC. We are in a unique position to advise institutional and retail clients on how to access this vast investment opportunity because we have a depth of expertise on the ground in China and across our entire network. Whether you’re talking QFII or RQFII, where we already have a dominant market share, or whether you’re looking more broadly at the internationalisation of RMB and the opening up of the market, we have a lot to offer our clients.
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