3 Aug 2017
Current Operation and Future Prospects of Shanghai—Shenzhen—Hong Kong Stock Connect
This year marks the 20th anniversary of Hong Kong's return to the Motherland. When we review the developments of Hong Kong’s stock market during the past 20 years, Shanghai—Hong Kong stock connect and Shenzhen—Hong Kong stock connect (hereinafter referred to as stock connect), as the groundbreaking mechanism of coordinated development between Mainland and Hong Kong stock market, also attract plenty of attention. This article analyzes the performance of stock connect since its launch, its main features, and its prospects.
Developments and features of stock connect
As a pilot mechanism of connectivity between Mainland and Hong Kong markets operating under the principle of “closed loop cross-boundary fund flow, RMB settlement, maintaining investor trading habits and stringent risk management”, Shanghai—Hong Kong stock connect has been running for more than two and a half years since its launch on 17th November 2014. Two years after the smooth operation of Shanghai-Hong Kong stock connect, Shenzhen—Hong Kong stock connect was launched on 5th December 2016 and has been in operation for more than half a year. Throughout the keen expectations before the launch of stock connects, the relative calmness since their operation and then the deep adjustment of the stock markets in mid-2015, stock connects have been operating smoothly. Thanks to the improvements and upgrades of the mechanism, linkage between these two markets has increased, while their own characteristics have remained intact. Stock connects have effectively promoted the coordinated development of Mainland and Hong Kong stock markets
1. Improvements and upgrades of the mechanism
Developments of stock connect have gone from effective control to orderly opening, from concentration to diversification. In terms of quota control, the mechanism established two thresholds including aggregate quota and daily quota, to mitigate the impact on Hong Kong’s stock market from Mainland retail investors in the short term. This helps to fully guarantee the security and relative independence of the two stock markets during increased market fluctuations. After the adjustment in stock markets, the stock connects mechanism canceled the aggregate quota at the end of 2016 when the aggregate quota was about to exceed the limit. But the mechanism still maintains the daily quota, reflecting its aim of balancing risk control and market opening. In terms of eligible stocks, the Shanghai—Hong Kong stock connect initially covered only large and medium-sized stocks in these two stock markets, raising the barriers to investors. Then Shenzhen—Hong Kong stock connect, launched at the end of 2016, covered some small-sized stocks and GEM stocks but added requirements of investor qualifications and market capitalization, to provide diversified investment choices while at the same time protecting the interests of investors.
2. Moderate use of quota
According to the proportion of daily quota balance to total daily quota in past years, use of daily quota of stock connect is at rather moderate levels except for the first day of the launch of Shanghai—Hong Kong stock connect and before the stock market boom in April 2015, when the quota of southbound connect was exhausted. As a result, the performance of stock connect was once considered falling short of market expectation. However, two factors should be taken into account. First, the basis for calculating quota in stock connect is the offset balance between buy orders and sell orders, so when buy and sell orders were relatively balanced, that the reported use of quota could be lower than actual trading activity. Second, as the bridge of connectivity between Mainland and Hong Kong, it is not accurate to measure the success of stock connect only according to turnover. Rather, the overall smooth operation should be considered a success.
Since the launch of Shenzhen—Hong Kong stock connect on 5th December 2016, use of quota in Shenzhen northbound trading is relatively stable. Except the first day when less than 80 per cent of the northbound daily quota was used, roughly 90 per cent of the daily quota was used in most of the trading days. In comparison, Shanghai northbound trading witnessed larger fluctuation, sometimes less than 90 per cent of the daily quota being used while on quite a few trading days more than 100 per cent of the daily quota were used (net sell). Southbound trading showed similar pattern. About 90 per cent of the daily quota was used in Shenzhen southbound trading, while such proportion in Shanghai southbound trading ranged widely from 40 per cent to 120 per cent. Comparing the southbound trading to northbound trading, use of quota in southbound connect is obviously better, especially in Shanghai southbound trading, which provides support to Hong Kong stock market in the first half of this year.
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