(Bloomberg) — A decade after China opened up its exchanges to a broad swath of international investors through a trading link with Hong Kong, investors are craving deeper access.
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With billions of dollars worth of trading volume flowing across the border between Hong Kong and Shanghai and Shenzhen on a daily basis, the stock connect has been a success. While the link was later expanded to include bonds, exchange traded funds and interest rate swaps, it has yet to allow investors to access the primary market, or initial public offerings.
Charles Li, one of the key architects of link as then chief executive officer of the Hong Kong Exchanges & Clearing Ltd., said that opening up the primary market was always the ultimate aspiration.
“There is even a greater future for Stock Connect” to allow Chinese investors to subscribe to Hong Kong IPOs and vice versa, Li, who stepped down as CEO in 2020, said in an interview.
The idea of allowing Chinese investors to tap IPOs in the former British colony has never been on the top of the agenda for risk-averse policymakers and regulators, even though many mainlanders are able to circumvent capital controls to invest in Hong Kong share sales.
HKEX Chief Executive Officer Bonnie Chan declined to give any start date on primary connect, saying “everything has its moment” and that with a more robust IPO pipeline “conditions will be riper.”
“We are just at the beginning,” of the connect program, she said in an interview with Bloomberg TV. HKEX will look at building out connect with more products, better infrastructure and bringing in more participants, she said.
The link is being celebrated at a ceremony in Hong Kong on Monday, with speakers including Chan and her counterparts in Shanghai and Shenzhen, as well as local and mainland regulators.
Turnover is rising again after two sluggish years as Chinese and Hong Kong bourses slid. China’s recent stimulus measures and market support has also caused trading to surge.
Average daily trading northbound — or into China — has reached about $17 billion a day, while trading southbound has risen to almost $5 billion.
The exchange estimates that net more than 1.8 trillion yuan ($249 billion) has entered Chinese stock market from the program. Another HK$3.4 trillion ($436 billion) has flowed into the Hong Kong market, according to HKEX data.
The link now accounts for almost 7% of Chinese daily turnover, and as much as 17% of the Hong Kong volume. About 3,300 stocks are eligible under the program, covering 43% of the available equities and 90% of the market capitalization of the three bourses.
Thomas Fang, head of China Global Markets at UBS Group AG, said that while the connect program has been “the most successful financial innovation in the world,” international investors now also need more access to products in futures, Treasury bonds and commodities for risk management.
Kinger Lau, chief China equity strategist at Goldman Sachs Group Inc., said broadening the investment scope for investors and reducing transaction costs could further enhance the value proposition and appeal of Stock Connect.
Expanding the link has not always gone smoothly. It took 10 years for Hong Kong to accept dual class shares and get them included. For example, starting in September, mainland Chinese investors were finally allowed to invest into e-commerce behemoth Alibaba Group Holding Ltd.
The city has also struggled with a lack of liquidity.
While Stock Connect is “irreplaceable” it should add more eligible stocks and lower trading fees to boost liquidity, said Yang Junxuan, a fund manager at Shanghai Junniu Private Fund Management Co., who has used the trading link for five years. “Investing in H shares is not an easy job due to lack of liquidity.”
State-owned bank behemoths are the most net-bought shares both northbound and southbound. Industrial & Commercial Bank of China Ltd. is particularly well-loved both sides.
China’s regulator announced in April that real estate investment trusts would be added to the program, though the market is still waiting for a definite start date.
US President-elect Donald Trump is now also adding to uncertainty in the market, including whether the new administration will derail a discussion to expand MSCI Inc. index inclusion of mainland shares.
HKEX’s Chairman Carlson Tong said that it remains a wait-and-see because Trump also relies heavily on Elon Musk, who runs a large business in China.
“We can only work on what we can do, not to be over-complacent, and not to worry about” geopolitics that’s out of our control, Tong said in an interview.
–With assistance from Jason Liao, Stephen Engle and Joanne Wong.
(Updates with comments from HKEX CEO in sixth paragraph.)
