Hong Kong Stock Connects with Shanghai and Shenzhen are coming into their own

Written by Anshuman Jaswal || October 04 2017

The equity market cross-connects between Hong Kong and Shanghai, and Hong Kong and Shenzhen have begun to show signs of growing maturity.

The Shanghai-Hong Kong Stock Connect was launched in late 2014, while the Shenzhen-Hong Kong Stock Connect began in late 2016. In its early days, the Shanghai cross-connect was slow to pick up volume, leading to concerns over whether it would become successful. However, over time, it has proved to have been a smart decision.

The unique nature of the cross-connect reflects the relationship between Hong Kong and China. As the two come closer economically, politically and administratively, the cross-connects would allow, especially retail investors, a means to access the other’s market. The maturity of the cross-connect is illustrated by how each market is influencing and influenced by the other.

The southbound trading from the mainland into Hong Kong is focused more on technology and clean energy stocks, in line with the stocks that are more popular with retail investors in mainland China. The northbound investment from Hong Kong is focused on similar stocks, but in more established companies, with possibly lower risk-taking characteristics being exhibited by Hong Kong investors as compared to their Chinese counterparts.

The interplay of the investment into the two markets has other attributes as well. The Hong Kong market is benefitting from the relatively high growth rate and the size of the Chinese economy. Along with the higher volumes to the cross-connect, we are seeing an interesting phenomenon, as the Hong Kong stocks that mainland investors are trading in are performing better than the Hang Seng index.

The southbound trading comprises around 13% of the overall trading volumes for the Hong Kong exchange in September 2017. This is higher than it has been throughout 2017, and is expected to grow further. One of the reasons for the attractiveness of the market is the fact that Hong Kong has same day settlement whereas it takes a day longer in Shanghai. This makes the market more attractive to day-traders in mainland China. This is also reflected in the direction in which these traders are moving the Hong Kong market, with the rise in momentum based, short-term trading similar to that in the Shanghai and Shenzhen markets.

The cross-connects between the two markets were an interesting idea to begin with, reflecting the economic, political and regulatory attributes of the two markets of mainland China and Hong Kong. While it would be difficult to emulate the relative success of the cross-connect in markets outside China, the Hong Kong Stock Connects certainly show that there is a strong appetite for investors in both markets to trade in the other. It should also be a signal to the Chinese security market regulators that there is appetite for closer ties and more open trading between the two markets, and they should continue with the capital market liberalization policies that they have pursued, especially over the decade. As the global economy struggles with the signs of a slowdown in some of the leading markets, cross-border trading through the stock connects could allow especially the Hong Kong market to better weather any downturn, while acting as a catalyst for the evolution of markets in both mainland China and Hong Kong.