23 October 2018
Chinese authorities could allow Hang Seng Small Cap Index constituents to be brought under the ambit of the Stock Connect program, observers say. Photo: HKEJ
Chinese authorities could allow Hang Seng Small Cap Index constituents to be brought under the ambit of the Stock Connect program, observers say. Photo: HKEJ

Stock Connect: How it can be improved

It’s been more than three months since the Shanghai-Hong Kong Stock Connect got underway in November. Taking stock of the transaction volumes, it’s difficult to dispute the fact that the cross-border trading program has failed to live up to expectations.

Authorities and market players have different takes on why the link has not been as popular as hoped. Meanwhile, various proposals are being put forward to enhance the appeal of the scheme.

In the latest initiative, lawmaker Christopher Cheung Wah-fung, along with some colleagues from the Business and Professionals Alliance for Hong Kong, has held a meeting with Xiao Gang, chairman of the China Securities Regulatory Commission.

The meeting was held on the sidelines of China’s “Two Sessions”, where top officials gathered to discuss the nation’s economic and other policies.

At a news conference following the meeting with Xiao, Cheung mentioned some ideas that had been suggested by Xiao.

One proposal is to give mainland investors more Hong Kong stock choices.

Currently, mainland investors can buy up to 284 stocks listed on the Hong Kong bourse. Most of them are blue-chips and large-caps that make up the benchmark Hang Seng Index and H-share index.

Mainland investors are familiar with the blue-chips, but they prefer small-cap stocks when it comes to investment. The reason: the small-caps are more volatile, offering bigger chance to make speculative bets.

Hanergy (00566.HK), for example, is by far the most popular counter under the Stock Connect. The company’s share price tripled at one point after the cross-border program started.

Paul Pong Po-lam, managing director at Pegasus Fund Managers, believes Chinese authorities will open up the constituents of the Hang Seng Small Cap Index for trading in the next step, according to Ming Pao Daily.

Alex Wong Kwok Ying, director of Ample Finance Group, has a different perspective on why the Stock Connect has been lackluster.

He says the low transaction volume under the Stock Connect program is due to excessive trading limitations. Merely bringing more stocks under the ambit won’t solve the problem, Wong says.

At present, investors have to transfer their capital back to mainland once they sell stocks in Hong Kong. This is a rule that most market players don’t find it convenient.

Also, a high threshold for entry into the Hong Kong market is seen as an obstacle for small investors. Now, only those who have 500,000 yuan in their investment and cash accounts are eligible to trade under the program.

Xiao said the 500,000 yuan threshold is not high for mainland investors, according to Cheung. The mainland regulator, instead, feels that a more significant obstacle is that Chinese investors are not familiar with the Hong Kong market.

To resolve this problem, Xiao suggested that Hong Kong companies should hold more road shows in the mainland and introduce themselves to Chinese investors.

To help promote the stock link program, CSRC also said it will consider letting insurance funds and the Social Security Fund to buy into Hong Kong stocks.

Meanwhile, authorities will also discuss a reduction in the security deposit ratio for brokerages in order to stimulate HK flows into Shanghai stock market.

Hong Kong brokerages have to pay a deposit which equals to 20 percent of the transaction value when involved in A-share trading. The security deposit has to be paid as mainland authorities are concerned about currency risks.

Choy Sze-chung, vice president of National Resources Securities, said that in the case of local stock trading in Hong Kong, the stock exchange usually returns deposit to brokers once a transaction is settled.

“But for trading under the Stock Connect program, the stock exchange normally holds the deposit for more than a month, causing financial pressure for the local brokerage firms,” Ming Pao quoted Choy as saying.

As authorities mull improvements in the cross-border trading scheme, plans are already afoot for a new link between the Shenzhen and Hong Kong bourses.

According to Cheung, most of the technical issues pertaining to the Shenzhen-Hong Kong Stock Connect have been resolved. The program is expected to be launched in the second half of this year.

Hopefully, as improvements are carried out to the existing scheme, the new Shenzhen-HK stock link will be a refined version of the trading program with Shanghai.

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EJ Insight writer

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