Stock Connect delays should not alarm asset managers and investors

28 Oct, 2014

Delays to the much-awaited Shanghai-Hong Kong Stock Connect scheme should not alarm asset managers and investors hoping to transact in mainland Chinese A-shares amid concerns the adjournment is attributable to regulators and market participants struggling to overcome operational hurdles.

Hong Kong Exchanges & Clearing said on Sunday that Stock Connect had no firm timetable.  This came ten days after the Asian Securities Industry and Financial Markets Association (ASIFMA) penned a letter to Hong Kong regulators asking for one month’s notice prior to Stock Connect’s implementation.

This comes as reports suggest there are operational challenges surrounding how taxes will be collected on share gains and issues around the custody of assets. Another difficulty lies with the different trade settlement cycles between China and Hong Kong. China, for example, has a T+1 settlement cycle for cash and a T+0 settlement cycle for securities whereas Hong Kong adopts a T+2 settlement cycle for both cash and securities.

However, some believe these challenges have been exaggerated. “The whole market has been focusing on the new Stock Connect regime and the access it will provide to the Chinese equity market. Asset managers and investors are getting ready for this, and market participants are well-prepared and simply waiting for the official announcement to be made. Market participants such as brokers have the infrastructure in place for the new regime,” said Patrick Wong, head of China sales, business and development for HSBC Securities Services in Hong Kong.

The initiative, announced in April 2014, is likely to further mainland China’s integration into financial markets. Florence Lee, head of China sales and business development for Europe, Middle East and Africa (EMEA) at HSBC Securities Services, speaking on an HSBC webinar – “Routes to China” – said Stock Connect would enable foreign investors access into China, although conceded there were restrictions insofar as investors will not be able to access the Shenzhen Stock Exchange. Nonetheless, there are reports that the Shenzhen government has suggested to the China Securities Regulatory Commission (CSRC) that it too could connect its stock exchange with that of Hong Kong.

China has made significant steps in opening up its capital markets to foreign fund managers over the last year.  The mutual recognition scheme will enable Hong Kong fund managers to market to mainland investors without having to partner with a Chinese firm or apply for a license, a historically cumbersome process. Mutual recognition, which is also awaiting a firm implementation date, is likely to lead to the internationalisation of the Renminbi and provide a boost to China’s domestic asset management industry by opening it up to international investors. “It is a hugely exciting time for asset managers in the region,” said Wong.

There is speculation China could extend mutual recognition beyond Hong Kong in a manner not too dissimilar to how the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes were extended. A recent report by HSBC said Singapore, Taiwan, Luxembourg and even the UK were all potential candidates for an enhanced mutual recognition scheme although this has been denied by the Chinese authorities.

Singapore, for example, has developed its RQFII offerings quickly while Taiwan has well-established cooperation agreements with China and a strong domestic funds industry, which makes it an equally attractive partner. Luxembourg or Ireland, the domiciles of choice for UCITS, would also be ideal although the HSBC report pointed out that China’s mutual recognition scheme could in fact be a ploy to limit the spread of UCITS into the mainland.  HSBC’s report described the UK as a dark horse candidate. While the UK has the technical expertise and is a growing Renminbi hub, its historical links with Hong Kong could work against it, continued the HSBC report.

China is also opening up its doors to hedge funds. The Qualified Domestic Limited Partner (QDLP) Programme permits a limited number of foreign hedge funds to tap the wealthy private investor community in Shanghai for capital. However, this is subject to onerous restrictions.

The country is certainly home to an enormous investor base. With a Gross Domestic Product (GDP) in excess of $8 trillion, and a population with investable assets of more than $13 trillion, China is home to the world’s largest pools of capital, according to a study by Barclays. “China is the world’s most important investment destination. It has a huge number of high-net worth individuals with roughly $4.4 trillion in investable assets,” said Cian Burke, global head of HSBC Securities Services.





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