Traditional funds to step up investments via Stock Connect: Citi

May 11, 2015 11:18
A newly-launched special segregated accounts service has eased worries about counterparty risks, encouraging more traditional funds to focus on the Stock Connect program, says Ctigroup's Cindy Chen. Photo: HKEJ

Overseas funds will step up utilization of the Shanghai-Hong Kong Stock Connect program in the coming months to channel more money into Chinese stocks, according to a Citigroup executive.

At least 10 traditional funds are mapping out plans as new rules facilitate special segregated accounts, eliminating the worries about counterparty risks, the Hong Kong Economic Journal quoted Cindy Chen, head of securities services at Citigroup Hong Kong, as saying.

The funds include those structured under a European Union directive, namely the Undertakings for Collective Investment in Transferable Securities, or UCITS, and possibly pension funds in the future, she said.

Funds registered under UCITS have to seek European regulatory approval before investing in the Chinese capital market through the Stock Connect. This is because of perceived lack of investor protection.

At the start of the stock connect, investors were required to transfer their securities to brokers from trustees before selling their holdings, leading to worries about counterparty risks, Chen noted.

But a newly-launched special segregated accounts service by Hong Kong Exchanges and Clearing Ltd. (00388.HK) has resolved the issue, prompting more traditional funds to join the league, she said. 

The previous situation has made about half of the northbound investments with Citi through the stock link to come from hedge funds, with only 10 percent from sovereign funds.

The picture is expected to change in the next six months.

The stock link now generates about US$1 billion in daily transaction value.

Net purchases northbound already make up for the equivalent of 30 to 40 percent of the combined quota under US dollar-denominated qualified foreign institutional investor scheme and its renminbi-denominated equivalent, according to Chen.

Translation by Vey Wong

[Chinese version中文版]

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Hong Kong Economic Journal