Shanghai-Hong Kong Stock Connect: It’s Just the Beginning

by Neil Katkov, PhD,  Hua Zhang, March 29, 2016
Regulation
Asia-Pacific

Abstract

Shanghai-Hong Kong Stock Connect provides international investors direct access to China’s domestic A shares market for the first time. However, it is hampered by a number of idiosyncratic features.

The Stock Connect scheme, however, presents a number of restrictions and operational challenges that constrain trading strategies, create operational complexity, and introduce risk. These include:

  • Hybrid settlement cycle.
  • No day trading and limited support for short selling.
  • A requirement to settle in RMB.
  • Asset fungibility issues.
  • Shareholder risk and reporting.

Shanghai-Hong Kong Stock Connect, launched in November 2014, is a mutual market access service between the Hong Kong and Shanghai stock exchanges. From the first proposal a decade ago, such a trading link has been eagerly awaited by international investors seeking direct access to China’s equities market.

“The Stock Connect program is only the first step in a gradual opening of China’s capital markets to international trading,” says Neil Katkov, senior vice president of Celent’s Asian Financial Services practice and author of the report. “Increased trading quotas, extension to other asset classes and venues in China, harmonization of trading rules with global practice, and, ultimately, enablement of low-latency advanced trading strategies are sure to follow.”

This report provides an overview of Shanghai-Hong Kong Stock Connect, examines the operational challenges of its unique trading model, and estimates the potential of Stock Connect-like mutual market access initiatives.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

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Europe (London)
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Table of Contents

Background

1

Executive Summary

2

 

Key Research Questions

2

Shanghai-Hong Kong Stock Connect in Context

4

Shanghai-Hong Kong Stock Connect: Overview

5

Restrictions of Shanghai-Hong Kong Stock Connect

6

Resolving the Barriers

7

 

Barriers for Institutional Investors

7

 

Barriers for Hedge Funds

8

Opportunities for Market Participants

9

 

Sell Side Opportunities

9

 

Buy Side Opportunities

9

Operational Challenges

11

 

Hybrid Settlement Cycle

11

 

RMB Settlement

11

 

Asset Fungibility Issues

12

 

Shareholder Reporting

12

Risk Management Challenges

13

Regulatory Goals

14

Shanghai-Hong Kong Stock Connect: It’s Just the Beginning

16

 

Technology and Operational Implications

17

Leveraging Celent’s Expertise

19

 

Support for Financial Institutions

19

 

Support for Vendors

19

Related Celent Research

20

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