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Outline of Shenzhen-Hong Kong Stock Connect—A New Chapter of Connectivity
Author： Source： Date：2017-08-30
On the afternoon of September 30, 2016, Mr. Li Xiaojia (a.k.a. Charles Li), Chief Executive of Hong Kong Exchange and Clearing Limited (HKEX), visited Shenzhen Innovation and Development Institute (SZIDI) and shared his insights on Shenzhen-Hong Kong Stock Connect—A New Chapter of Connectivity at the institute’s Public Lecture Series
In his speech, Charles Li looked back on the “three major themes” at the beginning of China’s reform and opening-up program: transit trade, introduction of direct investment and development of capital market. He pointed out that transit trade created “the first bucket of gold” for China’s economic development; foreign direct investment contributed to China’s standing as “the world’s factory”; and the development of capital market fostered a large number of giant corporations with globally leading market capitalization size.
Li believed that the three major themes throughout the three decades of reform and opening up have one common feature, i.e.“Money goes to China”;And Hong Kong has, in the past three decades, fitly played its role as China’s “preferred offshore financing center” and contributed to the “win-win relationship” between Mainland China and Hong Kong. Yet in the next 30 years, China, already the world’s second-largest economy, will be confronted with another distinctly different challenge: a massive transformation from a capital-importing country to a capital-exporting country.
“In order for China’s capital market to become a truly international marketplace, China must adhere to the opening-up policy. Opening-up means both bringing in and going global.” said Charles Li. The essence of both Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect mechanism is to address such a “simple question”: How to “bring in” and “go global”? Li believed the key problem is that China’s capital market and the international capital market cannot achieve real “institutional integration” in the foreseeable future, as a result of their differences in development paths, cultural backgrounds and market structures.
Taking the securities market regulatory system as an example, Charles Li explained that, through a century of market evolution, the Western society has formed an Exchange pattern of “dual structure”: the Exchanges mainly serve and monitor hundreds of its member institutions; ordinary investors enter capital markets through institutional agents, thus creating the “institutional game” model in market transactions. By contrast, due to the outbreak of massive failure of broker risk management around the Millennium, China’s securities market has undergone stringent rectification and improvement. As a result, it has formed a “direct transaction” model in which every investor must directly open an account at the securities exchange; and the regulatory system has changed from the indirect approach of “institutional regulation” in the early days to the penetrating approach of “account regulation”, resulting in an institutional disparity from the “dual structure” prevailing in the international securities markets.
“Foreign investors are unlikely to change their usual practice just to buy Chinese stocks; and Chinese retail investors are not accustomed to the transaction patterns in the international market as well,” Li added, the essence of Shanghai (Shenzhen)-Hong Kong Stock Connect mechanism is to, with the three stock exchanges and the clearing companies in Hong Kong and mainland as the main body, “act as agent and manage” the transaction demands of domestic and international investors and complete the transaction lists in the way of inter-Exchange settlement.
Apart from making the Chinese transaction mechanism and conventional practice geared to international ones, another “secret weapon” of Shanghai (Shenzhen)-Hong Kong Stock Connect mechanism is the management mechanism over the capital flow: in the enclosed capital settlement channels, the Hong Kong stocks assets bought in RMB, if sold out, return to the hands of investors in the form of RMB; likewise, the Mainland assets bought in foreign capital, if sold out, return to the investors in the form of HKD .
The president of the SZIDI, Mr. Zhenhua Mao, later commented that in the future, the settlement mechanism will become the greatest attraction of Shanghai (Shenzhen)-Hong Kong Stock Connect to domestic investors; having experienced a long period of time of RMB appreciation, investors are likely to purchase Hong Kong-listed international assets via the Shanghai (Shenzhen)-Hong Kong Stock Connect, and enjoy the exchange rate earnings and investment yields earned by international enterprises without “RMB exits”.
Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
In his speech, Charles Li looked back on the “three major themes” at the beginning of China’s reform and opening-up program: transit trade, introduction of direct investment and development of capital market. He pointed out that transit trade created “the first bucket of gold” for China’s economic development; foreign direct investment contributed to China’s standing as “the world’s factory”; and the development of capital market fostered a large number of giant corporations with globally leading market capitalization size.
Li believed that the three major themes throughout the three decades of reform and opening up have one common feature, i.e.“Money goes to China”;And Hong Kong has, in the past three decades, fitly played its role as China’s “preferred offshore financing center” and contributed to the “win-win relationship” between Mainland China and Hong Kong. Yet in the next 30 years, China, already the world’s second-largest economy, will be confronted with another distinctly different challenge: a massive transformation from a capital-importing country to a capital-exporting country.
“In order for China’s capital market to become a truly international marketplace, China must adhere to the opening-up policy. Opening-up means both bringing in and going global.” said Charles Li. The essence of both Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect mechanism is to address such a “simple question”: How to “bring in” and “go global”? Li believed the key problem is that China’s capital market and the international capital market cannot achieve real “institutional integration” in the foreseeable future, as a result of their differences in development paths, cultural backgrounds and market structures.
Taking the securities market regulatory system as an example, Charles Li explained that, through a century of market evolution, the Western society has formed an Exchange pattern of “dual structure”: the Exchanges mainly serve and monitor hundreds of its member institutions; ordinary investors enter capital markets through institutional agents, thus creating the “institutional game” model in market transactions. By contrast, due to the outbreak of massive failure of broker risk management around the Millennium, China’s securities market has undergone stringent rectification and improvement. As a result, it has formed a “direct transaction” model in which every investor must directly open an account at the securities exchange; and the regulatory system has changed from the indirect approach of “institutional regulation” in the early days to the penetrating approach of “account regulation”, resulting in an institutional disparity from the “dual structure” prevailing in the international securities markets.
“Foreign investors are unlikely to change their usual practice just to buy Chinese stocks; and Chinese retail investors are not accustomed to the transaction patterns in the international market as well,” Li added, the essence of Shanghai (Shenzhen)-Hong Kong Stock Connect mechanism is to, with the three stock exchanges and the clearing companies in Hong Kong and mainland as the main body, “act as agent and manage” the transaction demands of domestic and international investors and complete the transaction lists in the way of inter-Exchange settlement.
Apart from making the Chinese transaction mechanism and conventional practice geared to international ones, another “secret weapon” of Shanghai (Shenzhen)-Hong Kong Stock Connect mechanism is the management mechanism over the capital flow: in the enclosed capital settlement channels, the Hong Kong stocks assets bought in RMB, if sold out, return to the hands of investors in the form of RMB; likewise, the Mainland assets bought in foreign capital, if sold out, return to the investors in the form of HKD .
The president of the SZIDI, Mr. Zhenhua Mao, later commented that in the future, the settlement mechanism will become the greatest attraction of Shanghai (Shenzhen)-Hong Kong Stock Connect to domestic investors; having experienced a long period of time of RMB appreciation, investors are likely to purchase Hong Kong-listed international assets via the Shanghai (Shenzhen)-Hong Kong Stock Connect, and enjoy the exchange rate earnings and investment yields earned by international enterprises without “RMB exits”.
Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
