Stock Connect block trades part of China capital market charm offensive

The move follows pledges by Chinese authorities to boost the stock market and improve investor sentiment as the domestic economy struggles.

Global investors are awaiting details of a proposal that would allow block trading on Stock Connect for the first time, in a move likely to enhance efficiency and attract institutional interest.

The China Securities Regulatory Commission (CSRC) and the Hong Kong Securities and Futures Commission (SFC) on August 11 made the joint announcement to allow investors under Stock Connect - the mutual stock market access arrangements between mainland China and Hong Kong – to execute large-sized transactions at privately negotiated prices.

The operational and regulatory details of the new block trading mechanism are still under development. The respective stock exchanges are expected to announce implementation details and the official launch date “in due course”.

Price impact

Analysts say the new arrangement could reduce the potential price impact on the market of large-sized transactions.

Lyndon Chao, managing director of the Securities Department at the Asian Securities Industry and Financial Market Association (ASIFMA), told FinanceAsia (FA) the main advantage would be in cost savings to institutional investors.

“Block trading can become a key source of liquidity for investors and exchanges, maximising volume while minimising pricing impact and market volatility,” he said. “There has been significant trading positions amassed via Stock Connect that have been unable to engage in block trading and these will become unlocked once the new framework is implemented.”

Sharnie Wong, senior research analyst at Bloomberg Intelligence, told FA the new regulations would help cement Hong Kong’s position as China’s main capital markets hub.

“Hong Kong and mainland China securities regulators' proposed introduction of block trading under Stock Connect should enhance efficiency and could attract global institutional investors,” Wong told FA.

Boost for HKEX

“The northbound link accounts for about 6% of China's total stock market turnover, and every 10% increase in northbound turnover could lift HKEX's profit by about 0.8%, we calculate,” she added.

The Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect (launched in 2014 and 2016, respectively) have allowed investors from mainland China and Hong Kong to trade shares listed on each other’s market. 

Aimed at opening up China’s capital account and internationalising the renminbi (RMB), the scope of eligible stocks under the bi-directional arrangement has been gradually expanding.

In 2022, the scope of eligible stocks under Stock Connect was expanded to include exchange-traded funds (ETFs), international companies primarily listed in Hong Kong and a larger number of Shanghai and Shenzhen-listed companies.

Despite this, block trade have not been easily available under the Stock Connect regime.

Offshore investors could only previously engage in block trading through the Qualified Foreign Investor (QFI) scheme – a quota system that allows them limited access to the RMB-denominated capital market.

QFI restrictions

Since many Stock Connect participants do not have a QFI licence to access block trading, large-sized transactions involved lengthy procedures through separate transactions meaning costs could not easily be controlled.

Almost RMB100 billion (US$13.8 billion) is traded northbound each day in the Stock Connect link in the first quarter, according to Bloomberg figures. That was down 8% from a year earlier. Trading southbound was HK$37.5 billion (US$4.8 billion) a day in the same period, up 6%.

While the move comes as China launches a series of initiatives to lure global foreign investment amid an economic slowdown, institutional investors have previously been underwhelmed by regulatory moves to liberalise China’s capital markets.

Hong Kong’s SFC and the CSRC jointly announced in December the expansion of stocks eligible for trading, however analysts at the time said the impact on trading volumes was likely to be minimal.

Crowded market

The move increased by about 1,000 the number of small and mid-cap A-share – or mainland listed – companies on top of the 1,500 eligible companies, but analysts said both southbound and northbound trading was likely to continue to be dominated by the top 100 companies.

“With the recent expansion, some smaller names may attract some investors. But as far as I know, for overseas institutional investors, even though they are paying more attention to A-shares, they can’t spare the time to look at all of the over 5,000 stocks,” Hyde Chen, chief investment officer of private wealth management at Haitong International, told AsianInvestor in January.

“At the end of the day, they, or most funds, can still only invest in dozens of top names, or those in the CSI 300. To add a long tail on top of that is good news, but won’t have a significant impact on the overall market movement,” he added.

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