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ChinaChina People and Markets

The future of MMA beyond Stock Connect

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The upcoming launch of the Shenzhen-Hong Kong Stock Connect will give offshore investors access to close to 90% of China’s domestic stock market. Now the focus for the mutual market access (MMA) scheme will turn to new products including ETFs and bonds.

Hong Kong stock exchange (HKEX) CEO Charles Li pointed out in a Tuesday press briefing that although there is still room for further fine-tuning, the Stock Connect between China and Hong Kong is more or less complete once the Shenzhen link goes live.

That, however, does not signal the end of mutual market access as stock connectivity is just one part of the broader scheme.

“[Shenzhen Connect] completes secondary market mutual market access. The next step is to add to the existing infrastructure and things we could look at are IPO Connect, Futures Connect, FX Product Connect and Bond Connect,” Li said.

Li admitted that many of the initiatives are still in a conceptual stage, but one that is already in the works involves exchange traded funds (ETFs).

The inclusion of ETFs is scheduled to roll out in 2017, although there are issues to be solved as such products are cleared differently in Hong Kong, Shanghai and Shenzhen.

In Shanghai, shares are settled on a T+0 basis, whereas cash is T+1. But in Shenzhen ETFs are settled on a T+1 basis for both securities and cash, which results in a misalignment of settlement cycles if they are to be included in the Connect schemes.

“It makes sense for ETFs to be included even though they are funds because these things actually trade like a stock,” one head of Hong Kong securities services said. “But we don’t yet have a scenario [in Stock Connect] where shares and cash are moved on T+1, so arrangements will have to be made to cater to the different cycles.”

For now, Shanghai Connect shares are settled T+0 and T+1 for cash.

If ETFs are to become a reality, the securities services head said demand from the Chinese investor base would be strong, especially in portfolios with a wider exposure to developed markets.

“This is a good opportunity for Chinese investors to go out via the Connect and free up space in their QDII [qualified domestic institutional investor] quotas, which have quite a bit of restrictions in terms of what they can buy.”

Bond Connect

Once ETFs are included, Fielding Chen, Asia economist at Bloomberg Intelligence, said the next in line would be Bond Connect.

A Bond Connect scheme between China and Hong Kong has been mooted ever since the launch of Shanghai Connect in 2014. HKEX’s Li even went as far as to say earlier this year that they are pursuing a link up with China’s exchange bond market and interbank bond market (CIBM).

But doubts have always persisted over the scheme’s possible benefits, especially in the wake of CIBM’s access relaxation for international investors. Chen, however, believed Bond Connect does have a role to play.

“The [CIBM] rules are great but the reality is we haven’t yet seen a great deal of foreign investors getting unrestricted access,” Chen pointed out. “In this context, Bond Connect would be very useful since foreign investors would have an extra and probably better channel to invest in onshore bonds, which they do not have to register with the Chinese authorities and that is not bound by QFII/RQFII [renminbi qualified foreign institutional investor],” he added.

Only six foreign investors have been given unrestricted access into CIBM  since China came up with the reforms this year.

Derivatives unlikely

Another asset class HKEX’s Li mentioned was Derivatives Connect, which he said had received a lot of enquiries from international investors.

Vincent Chan, head of China research for Credit Suisse, agreed there is genuine demand for international investors to hedge their onshore China exposure – something that they can only do indirectly via the offshore market now.

He sees little problem for derivatives to appear from the Hong Kong side of the Connect as the city boasts a very developed derivatives market, although there is a question over the number of products that would be available in China.  

“Derivatives products here [Hong Kong] are almost tailor-made to match any investor's needs whereas there really isn’t a lot for investors to choose from in Shanghai and Shenzhen,” he said.

A Hong Kong-based economist said that China does have the expertise to provide derivatives products but that the issue is whether the authorities are willing to do so.

That is because China has always been very mindful of speculative investments, which derivatives would naturally bring about.

“Hedging and speculation will always come in a pair. But China doesn’t like speculation. Definitely not when the country is just recovering from the stock market collapse last year, while its currency is still under depreciation pressure,” he said.

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