China’s stock exchanges are refining Stock Connect but big investors and bankers believe bigger and bolder reforms are needed before the trading link can be easily used as a bridge into China’s A-shares.
Speaking at a FinanceAsia conference on Monday panellists asked for a range of changes to Stock Connect, the trading link between Hong Kong and Shanghai launched in November, including overseas investor access to initial public offerings and clarification of the rules regarding beneficial ownership in China.
“We admit not everything was perfect. I know there are still some concerns,” the Hong Kong Exchanges and Clearing’s chairman Chow Chung Kong said at the conference.
While Stock Connect allows easier access to A-shares it does not include all the stocks listed on the Shanghai exchange.
“The key hurdle is the limited universe,” said William Fong, Investment Director, Asian equities, at Barings Asset Management. “The blue skies scenario is that there is no restriction at all.”
In addition, some foreign funds don't have the necessary approvals to be able to use Stock Connect, including two Luxembourg-registered funds managed by another panellist Bin Shi, managing director of China equities at UBS Global Asset Management.
“All these problems comes from the difference between international practice and Chinese practice … the problem is that all our products [are] based on international practice and we have to abide by them,” Shi said.
HKEx's Chow said the bourse is working with the China Securities Regulatory Commission to improve investors' understanding of beneficial ownership under the scheme. He also said that a volatility control mechanism and closing auction session could soon be introduced.
Although he didn't mention a launch date for a mooted trading link between Hong Kong and Shenzhen, Chow said he was optimistic that the take up from investors would be faster than on the Shanghai-Hong Kong Stock Connect, once it did get the green light. “Hopefully the market is already familiar with the Stock Connect programme because of the Shanghai link, so there should be fewer hurdles this time around.”
However, overseas investors currently cannot participate via Stock Connect in mainland Chinese equity capital market deals, except for rights issues -- something fund managers want to see changed.
“We would like to see IPOs, placements, and other corporate action deals. We would definitely like to participate if we were allowed through Stock Connect,” said Michael Chiu, investment director of equities HSBC Global Asset Management.
Goldman Sachs’s Ryan Wuebbels, an executive director in principal strategic investments, said he and others were also lobbying the exchange settlement to allow brokers to use their own shares if there is a likelihood of settlement failure for a client.
Foreign investor demand is certainly building. Barnaby Nelson, Standard Chartered's regional segment head for North East Asia and Greater China, said the British bank is opening 10 to 15 accounts every week to use Stock Connect. But worries about beneficial ownership were still an issue in some Europe jurisdictions, including Ireland, in terms of allowing UCITS to use Stock Connect. UCITS are collective investment schemes that can be freely marketed throughout the European Union.
“We've not met [the] tipping point yet,” said Andrew Gordon, head of Asia, RBC investor and treasury services, in terms of the number of investors wishing to use Stock Connect.
For HKEx’s Chow, nonetheless, the programme is definitely heading in the right direction. “Not all investors will use our bridges but if we keep the tolls down and make it fast and convenient, they will be at least as competitive as any other method,” he said.