The arbitrage that enabled investors to make money from structured products ahead of the creation of the Shanghai-Hong Kong Stock Connect is not large enough to inspire the creation of similar products ahead of the Shenzhen-Hong Kong Connect, according to a Hong Kong-based banker.

While UBS went very public with the “few hundred million (US dollar equivalent)” of structured products it created ahead of the tie-up between the Hong Kong Exchange (HKEx) and Shanghai – notably through products that went long on Ping An A-shares and short on the company’s H-shares – the same characteristics are not there for Shenzhen, said one banker. Arbitrage-based structured products launched ahead of the Shanghai–Hong Kong Stock Connect were private banking and institutional products with generally a tenor of one year.

“I haven’t seen any of these products in the market; maybe this is related to the small difference in the price gap,” said the banker. There might be limited interest even if derivatives products were included in this future connect, as “there are fewer big names whose shares are listed in Shenzhen Stock Exchange that there were for the Shanghai-Hong Kong Stock Connect”, he said.

Local media reports stated that the notes issued by a special purpose vehicle created by UBS were also traded on China Life Insurance, China Pacific Insurance, Agricultural Bank of China, China Petroleum and Chemical and Huaneng Power International.

The introduction of the Shenzhen–Hong Kong Stock Connect has been in planning since the successful launch of mutual stock access between Shanghai and Hong Kong stock exchanges. Yet a market player said that the arbitrage-based structured products once popular before the Shanghai–Hong Kong Stock Connect have not been seen in the market.

The Shenzhen Stock Exchange (SSE) announced the new stock connect at the beginning of February, stating that the initiative is designed to further expand the investment range of the future stock connect, including derivatives. “The [derivatives] industry talked a lot about the Shanghai–Hong Kong Stock Connect before the launch, but the influence is not instant,” said Janet Chong, product solution head of wealth management department at DBS Bank. “It is more important for the Chinese market to open up and gradually investor appetite will pick up.”

Compared with the Shanghai–Hong Kong Stock Connect, the Shenzhen version will allow an expanded range of investment products, besides direct investment in stocks, said Li Jun Wu, chairman of the SSE when visiting Hong Kong regulators and HKEx in early February. Wu said that that the Shenzhen version of the Connect would be “more market-oriented, but the basic structure will remain the same as with Shanghai–Hong Kong Stock Connect”.

Two months after the launch of the Shanghai–Hong Kong Stock Connect, the trading of Chinese stocks has been limited to blue-chip shares listed on the SSE. “[Once] investors from both China and Hong Kong get used to the cross-trading set-up there may be other instruments, such as bonds or futures, added to the programme as a way for China to gradually open up its capital markets and promote the globalisation of the renminbi,” said David Cui, head of China equity strategy at Bank of America Merrill Lynch.

The Hong Kong government is using the connect initiatives to develop a deeper relationship with China, noted Ka Keung Chan, secretary for financial services and the treasury bureau for Hong Kong, when addressing the Legislative Council on March 2.

The "mutual market" model enshrined in the connect initiative model could extend to other products, including equity derivatives, commodities, fixed income and currencies, said Charles Li Xiaojia, executive director and chief executive of the HKEx on January 20, 2015 in his Charles Li Direct blog, which appears on the HKEx website. Those international products that are needed by Chinese investors can be added, thereby enabling Chinese investors to diversify their investments and hedge against international price risks, said Li.

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