The Shanghai-Hong Kong Stock Connect was devised to benefit the Chinese economy and help the renminbi move toward becoming an international reserve currency, rather than serve as just a gift to Hong Kong, said Charles Li, chief executive of Hong Kong Exchanges and Clearing Ltd. (00388.HK).
The program is set to bring in the largest ever asset transfer in the world, helping the US$22 trillion Chinese banking sector, Li said in a speech at a forum in Shenzhen last Friday, according to Hong Kong Economic Journal columnist T Y Ko.
The A-share market in mainland China will expand enormously in the next five to 10 years, with approximately US$7 trillion to US$8 trillion of funds likely to flow in, Li was quoted as saying.
According to Li, a key architect of the stock through-train, four key elements in the mechanics of the cross-border trading program are aimed at taking the Chinese capital market into a new stage.
First, Hong Kong purchasing orders of the eligible A shares are all diverted to the Shanghai Stock Exchange that will do the price matching, ensuring a single point of price discovery of shares listed in Shanghai.
Second, settlement will be conducted everyday that will balance out orders from the buy and the sell sides on that day and keep cross-border clearing at the minimum.
The Chinese market can go international through investors in Hong Kong without having a large amount of liquidity circulating between the city and Shanghai.
Third, the monies involved in the program are literally running in a closed circuit that not a single penny is allowed to move toward real estate or any other asset class.
No money laundering or speculation in other markets, therefore, would result from the launch of the through train.
Fourth, renminbi is the sole means of transaction in the loop that makes the redback an investment currency and gradually become an international reserve currency.
Ko, meanwhile, noted that the launch of the stock through-train showcases Hong Kong’s position as a crucial offshore financial center for China that can benefit the mainland and local economy as a whole.
Meanwhile, it also represents a vote of confidence in the Hong Kong government and the police force with regard to their ability to bring the current civil disturbance situation under control, Ko added.
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