Relationships were a hot topic at the Asian Financial Forum on Tuesday when the Hong Kong-Shanghai Stock Connect scheme, which has just passed its two-month anniversary, came up for discussion.
China and Hong Kong ties were tested last year, what with the Occupy Central protests and the launch of the mutual access share scheme, and a “workshop” involving the heads of the two exchanges wasted little time building bridges.
Firstly there was the friendship between Charles Li, chief executive of Hong Kong Exchanges and Clearing, and Huang Hongyuan, president of the Shanghai Stock Exchange.
“When I first met Mr Huang 20 years ago, he was a nobody and knew very little. But I knew a lot less. There was a lot of discussion between young men in their 30s about what we were going to do with our lives,” Li told the audience.
“Twenty years later and we are running two of the largest stock exchanges in the world. Our friendship has intensified over many years and Shanghai-Hong Kong Stock Connect has brought us together almost as family.”
Families, as we all know, are not perfect by any means and Stock Connect is taking time to convince onlookers that it can, well, hold it together.
The scheme was launched on November 17 after being delayed due – unofficially at least – to Occupy Central, the political spat that tested the social and political relationship between China and Hong Kong last year.
Volumes were disappointing when it launched, with many investors, particularly on the mainland, adopting a wait-and-see approach. But two months on and attitudes are changing, Li and Huang said.
Huang said people had become more enthusiastic about opening accounts since the turn of the year and that people are beginning to feel more attracted to the Hong Kong market.
“It is an important, innovative project connecting the two places,” Huang said. “We have not come across any major problems or incidents. It is a stable and reliable bridge we have established.”
Work in progress
Volumes have held steady in terms of northbound investments but southbound trade has picked up.
For Stock Connect’s first 20 trading days, the average daily turnover in northbound trading was Rmb5.84 billion ($951 million) and Rmb757 million for southbound. From December 29 to January 9, the figures were Rmb5 billion and Rmb1.6 billion.
Huang said that funds were still getting things set up and that many were not ready to participate, and that something so big and complicated as Stock Connect takes time to take shape.
Many non-Chinese institutional investors did not understand the A-share market, Huang said, and mainland investors were still learning about Hong Kong rules and regulations.
When it came to rules and regulations, relationships, again were important, according to Li.
“With investors on both sides there is potential for misconduct and this requires the two policemen to work together,” Li said. “The regulators trust each other. They need to. They work with each other and help each other”.
More products, more investors
It is clear that the ongoing success of the scheme relies on liquidity and product range, an issue both were keen to address.
Li said discussions were taking place to introduce more products to the “mutual market”, including primary market stocks, equity derivatives, commodities and fixed-income products.
“We need to put more things in the mutual market and bring the world to the doorstep of China,” Li said. “If we have enough products, there is no reason why Stock Connect can’t be the preferred opening [to China] for months, years, even decades, until China fully opens.”
Li also spoke of a potential Hong Kong-Shenzhen Stock Connect scheme for cash equities, which he hopes will become a reality this year.
Huang, meanwhile, suggested that the existing scheme needed to attract more international funds and had to address the issue of multiple accounts for investors. He also said the scheme could look to include bonds and Exchange-Traded Funds.
A panel discussion following Li and Huang’s addresses took a more pragmatic view of the scheme but the theme was one of cutting Stock Connect some slack, although Li and Huang had both left by then.
“This is essentially a pilot for the opening up of China,” Mark Austen, chief executive of the Asia Securities Industry and Financial Markets Association (Asifma), said.
He acknowledged that participation was relatively slow from the funds covered by Asifma but the scheme was nevertheless “impressive” due to the “aggressive timetable” and that there was enormous interest across all asset classes.
Romnesh Lamba, co-head of global markets division, Hong Kong Exchanges and Clearing, told the audience he moved to Hong Kong 21 years ago this month and, in early 1994, worked as a banker on a lot of H-share IPOs.
“In those days people were like ‘what are H shares?’ It took a good 8-10 years through the Asian crisis before you got to the point where investors were comfortable with H-shares," Lamba said. “Now we are entering a new era. It’s inevitable it’s going to take some time due to a lack of research, a lack of research in English and market structure issues.”
The other members of the panel were Chin Ping Chia, head of research for MSCI, Alastair Murray, regional head of Asset Managers Sector, Asia-Pacific at HSBC, and Philip Tye, chairman of the Hong Kong National Group of Alternative Investment Management Association.
At one point a member of the audience eloquently continued the relationship theme, citing the “marriage” between the Australian Stock Exchange and Singapore Stock Exchange in 2011.
He questioned why the panel thought Hong Kong’s “marriage” with Shanghai could stand the test of time when the SGX and ASX “got divorced” after regulators vetoed their tie-up.
Lamba was surely only talking about Stock Connect with his answer.
“This kind of arrangement doesn’t work in markets that are completely open. China has not been open because it doesn’t want a big bang,” he said.
