Shanghai-HK Stock Connect prompts growth in index strategies
The Shanghai-HK Stock Connect (SHSC) programme caught the media spotlight in mid-April when the daily turnover of Hong Kong Exchanges and Clearing Limited (HKEx) rocketed to a historic high. The notional sales of Chinese onshore structured products referenced to Hong Kong listed shares or with themes related to the connectivity program have grown by 32% and stood at RMB1.09bn in April. Meanwhile, HKEx data also shows that total sales of listed warrants have surged to HKD480.4bn in April registering a 49% monthly growth.
SRP spoke to Mao Zhirong (pictured) – chief executive of China Exchanges Services Company Limited (CESC) and co-head of HKEx’s Mainland division – who talked about the ramifications of the Shanghai-HK Stock Connect and the breath of new opportunities made possible to market participants.
What are the key elements of the connectivity program and what does it mean to market players in the structured products market seeking to tap into the China wealth (re)growth story?
The Shanghai-HK Stock Connect (SHSC) is one of the most crucial developments to open up the country’s capital account and internationalise the renmimbi (RMB), and as such bears major implications on capital markets and the structured products market.
In essence, the SHSC program is the first controllable and expandable channel for mutual market access between the Mainland and Hong Kong by a broad range of investors. Eligible participants in each market are able to trade shares listed on the other market using only their local brokers and clearing houses.
Thanks to the rapid economic development of China over the past 20 years, around $20 to $24tr of wealth has accumulated in the domestic banking system and yet only $6 to $7tr is currently invested in the securities comprising of stocks, bonds and derivatives. This is an exceptionally low figure compared with the 1:1 ratio by international standard. Looking at China we see a relatively smaller pie of capital markets as a percentage of its total deposit base.
There is a constant need for domestic investors to utilise the idle money and diversify into a much wider investment spectrum available in overseas markets, including equities, bonds, ETFs and structured products. With the ability to invest in overseas market for the first time enabled by the SHSC, Chinese investors would seek exposure to foreign assets or instruments that are otherwise not available domestically; similarly overseas investors now have an end-to-end, efficient channel to invest directly in onshore securities or indirectly through structured products and other derivatives while the money stays out of China.
What is the role of SHSC under the current set up? How would you describe the paradigm shift in securities trading?
We see the SHSC as potentially the missing link that connects the country with the rest of the global financial system. China onshore securities market has been until now, a rather inaccessible investment hotspot on the radar of global investors under the regulated capital flow of Qualified Foreign Institutional Investors (QFII).
After 11 to 12 years of development, the QFII programme’s outstanding quota has accumulated to a total of US$73.6 bn by April 2015, of which only a small amount invested directly in A-shares. Bounded by many capital and operational restrictions – the QFII scheme alone clearly could not cater to the global demand for Chinese equities.
The same can be said for mainland investors. The Qualified Domestic Institutional Investors (QDII) program, which has amassed over $80bn in funds since its inception, has been the only window through which the onshore investing public can gain exposure to overseas markets - mostly by buying QDII structured products and wealth management products.
However, SHSC should not be seen as merely an upgraded version of QDII and QFII channels, but rather a strategic step for China to open up its capital market. What we are trying to achieve is analogical to building a bridge connecting two otherwise separate islands. The SHSC “bridge” is the most convenient means of transportation and people can easily travel back and forth multiple times in a day. Investors can sit in their home or offices and trade A-shares while the funds stay in their home countries, and vice versa.
Meanwhile, passengers can still take traditional ferries with limited capacity (QDII and QFII programs) as an alternative transportation. With the expandability of the SHSC infrastructure, we anticipate the construction of more bridges will continue to facilitate cross-border investment, and the availability of various means of transportation will enhance the broadness of investors’ choices.
What role(s) does CESC play in the development of a more connected marketplace?
Our main focus is to create and license indices for listed products across the three exchanges — HKEx, Shanghai Stock Exchange and Shenzhen Stock Exchange - and in the process act as a facilitator to further strengthen market connectivity by promoting and offering access products to institutions.
To capitalise on the market connectivity theme, we have recently launched an index series on SHSC to answer the market’s call for comprehensive, diversified exposure to the overall performance of eligible stocks in the program.
The index series includes CES Shanghai-Hong Kong Stock Connect 300 Index (CES SHSC300) and CES Stock Connect Hong Kong Select 100 Index (CES SCHK100). CES SHSC300 consists of the top 200 A-shares listed in Shanghai and eligible for the program plus the top 100 eligible stocks listed in Hong Kong. The CES SCHK100 is a more Mainland-catered version comprising of the top 100 Hong Kong-listed stocks eligible for the program, excluding the dual-listed A+H shares.
What are some of the thematic indexing ideas/products that would be of interest to market players?
We are seeing a lot of opportunities with these two new indices which have stimulated market interests from both sides, particularly from the onshore institutions who can then build new products around the indices. Despite the sheer size of the onshore capital market there is a lack of “richness” with current investable financial products. Through CESC index-linked products, Hong Kong and overseas investors will get exposure to equities of mainland companies listed in the three exchanges and derivatives products thereon listed on HKEx. In effect we are trying to cultivate a new ecosystem alongside China’s stock connect initiatives linking up market players with future business opportunities via a much-expanded investment space.