Who doesn't like a bandwagon? Most users might struggle to identify the differences between one iPhone model and the next, and yet they still sell faster than Foxconn factories can ship them. In the financial market, some participants are getting increasingly excitable about the prospect of not only opening up the Shanghai-Hong Kong Stock Connect to Shenzhen-listed companies, but also about plans for a possible Bond Connect platform.
But take a step back for a moment. Before launch, the market worried that Stock Connect trading quotas were going to be the source of all manner of evils. What if I place an order and the daily quota runs out and then I have to wait a full day for my order to be fulfilled? That would be disastrous if the market were to move dramatically, market players said. It would reveal trading intentions, and we can’t do that, they added.
This has hardly been the problem. Average daily net trading on the northbound channel has hovvered at around 16% of the Rmb13bn ($2.1bn) quota in the past three months, according to GlobalRMB data, and only a third of the total Rmb300bn quota has been used up.
True enough, other issues were problematic, such as securing regulatory approval for Ucits funds to start trading A shares, or exactly where beneficial ownership lay in the case of a clearing house default. Those issues have gradually been resolved, but participation remains thin.
The experience of the Stock Connect suggests that, despite all the talk of Chinese regulators needing to open up the capital account, the country's capital markets remain an exotic beast to most foreign banks. One head of sales noted that without research coverage of at least 250 A shares (out of the 2,100 across Shanghai and Shenzhen), you can’t really say you know the market — unless you only deal in exchange traded funds (ETFs).
He added that he could not think of many investment banks with that kind of coverage, and there is little evidence that banks have en masse suddenly started making the kind of investment needed to get up to speed.
And there are some odd dynamics at play. Some bankers say that expansion of A-share coverage is unwarranted without a pick-up in demand. Others have expanded their China research teams but are now regretting doing so as demand has been less than expected. But the Chinese equity market is only just starting to open up. Expecting quick returns seems shortsighted.
The suggestion that market participants seem to be out of step on the Stock Connect can be found in another of the arguments doing the rounds last year. The market's continued recommendation that A shares be excluded from the global indices provided by the likes of MSCI and FTSE was based on the limitation of access to such stocks other than through the qualified foreign institutional investors (QFII) scheme or its RMB denominated version, RQFII.
Logically, the existence of that access through the Stock Connect ought to mean that this resistance should disappear when the market is next asked to consider the topic. But if that is the case, it does not appear to be prompting the kind of positioning that would be expected by firms looking to build exposure ahead of the surge of activity from equity index-benchmarked players that such inclusion would drive.
All of which suggests that there is more to be done with what already exists before the Stock Connect becomes ripe for more development. Market participants and regulators should concern themselves with building the Stock Connect into a deeper and more liquid market before moving onto the next experiment. Few will benefit from a platform that gets broader but shallower, with myriad bits bolted onto it but few participants doing much more than scratching the surface.
It's not that adding Shenzhen to the programme, for example, is not a good idea. But that move, or the addition of IPOs, bonds or commodites will in itself do little to change the market’s readiness to buy Chinese assets. As the Stock Connect has mostly shown so far, access does not equal usage.
As tempting it might appear to run to the finish line of a fully open capital account, it might be wise to learn to walk first.