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Published: 15:16, October 06, 2022 | Updated: 18:49, October 06, 2022
Linking up with the world
By Wang Yuke in Hong Kong
Published:15:16, October 06, 2022 Updated:18:49, October 06, 2022 By Wang Yuke in Hong Kong

Capital market ‘connect’ programs between Hong Kong and the Chinese mainland have presented a key platform for the stepped-up inflow of international funds into the SAR and other Greater Bay Area cities. Wang Yuke reports from Hong Kong.

Hong Kong Chief Executive John Lee Ka-chiu (center) joins a ceremony on July 4 to celebrate the fifth anniversary of the launch of the Bond Connect and the upcoming rollout of the Swap Connect. The swap program is expected to start in early 2023. (PHOTO PROVIDED TO CHINA DAILY)

Since its establishment 25 years ago, the Hong Kong Special Administrative Region has held high its reputation as a world financial center, bustling with business and financial pursuits. With the deepened financial connectivity between the city and the Chinese mainland, there is every reason to believe the SAR’s cachet will continue to dazzle the world.

The multiple “connect” or mutual capital market access programs between Hong Kong and the mainland started in 2014. They have paid off, catalyzing fluid access and integration between the financial sectors of the both sides and drawing international capital into the mainland and Hong Kong for sustained benefits.

Seen as a milestone in consolidating the SAR’s status in the world financial landscape, the connect initiative is also proof that Hong Kong is playing an indispensable role as the nation’s offshore capital hub.

“Turnover on the Hong Kong stock market has soared more than 30 percent since the launch of the connect programs, borne out by the Bond Connect, the inclusion of exchange-traded funds in the Stock Connect, and more renminbi-designed products,” says Linus Yip, chief strategist at First Shanghai Securities in Hong Kong.

The global economy and financial markets have undergone profound structural changes since the 2008 global financial crisis, said Li Chen, a professor at the Chinese University of Hong Kong and a research fellow at the university’s Lau Chor Tak Institute of Global Economics and Finance.

A key part of the shift is that “the importance of China’s financial markets comes into prominence as the country further opens up,” says Li. “The connect programs represent a significant policy and business model innovation that promotes market infrastructure development and connectivity. They facilitate the prudent opening-up of mainland markets with built-in risk management mechanisms while stimulating capital flow into Hong Kong’s markets.”

From stocks, bonds and funds to ETFs and derivatives, the connect programs now cover a range of mainland onshore asset classes, said E Zhihuan, chief economist at Bank of China (Hong Kong).

The constant expansion of the two-way opening-up of financial markets has given Hong Kong more opportunities to flex its muscle in channeling foreign investment into the mainland’s capital markets while at the same time prompting mainland financial institutions to “go global”.

As of June, InvestHK — the SAR government agency tasked with strengthening Hong Kong’s position as Asia’s leading global business location and luring foreign direct investment — had helped at least 13 family offices based on the mainland and in Europe, the Association of Southeast Asian Nations, and North America to open up or expand their businesses in Hong Kong. “Overseas family offices have shown great interest in the mainland, especially in the Guangdong-Hong Kong-Macao Greater Bay Area,” says Dixon Wong, head of financial services and global head of family office at InvestHK.

“Hong Kong could be a crucial center for family offices to diversify their strategies to gain exposure to assets on the mainland and in Asia,” he says.

“The connect programs have lifted the quality, depth and breadth of interconnectivity between Hong Kong and the mainland, enabling global asset managers, family offices and ultra-high-net-worth individuals to use the SAR as an open platform to invest in various Treasury products on the mainland, and vice versa,” says Wong. These market links have shaped Hong Kong’s unrivaled and irreplaceable position as a hub for family offices in the Asia-Pacific region.


Effective access

The Stock Connect, initially just between the Hong Kong and Shanghai stock exchanges, kicked off in November 2014. It was extended to the Shenzhen bourse in 2016, allowing global funds easy access to the mainland’s stock markets. International investors can buy the mainland’s A shares with less restrictions, while mainland investors can purchase shares of Hong Kong and mainland companies listed on the Hong Kong bourse.

Yip says the programs have gone down well with international investors. “Following their launch, global benchmark providers MSCI and FTSE Russell began including A shares in their indices in 2019,” he recalls. This was made possible by the “effective and lubricant access to engage in the mainland market”, which is supported by the programs that entered the radar of global investors, he says.

The ETF Connect, which was rolled out in July, further extended cross-border access to a wider range of securities under the Stock Connect, allowing international investors to deal in 83 ETFs on the mainland. “The ETF is a good product as it’s a basket of composite stocks constructed to follow an index or to build under a theme. Hence, it’s more risk-controllable and diversified by itself,” says Yip.

The Bond Connect, with its northbound trading launched in 2017, has become the primary channel for international asset managers to tap into the mainland’s interbank bond market. It reinforces Hong Kong’s role as a world platform for bonds trading, which subsequently increases the funding flow. “When the flow of funds goes up, the demand for all aspects of professional services, like legal, trading, sales, settlement, custodian, compliance and rating services would increase accordingly,” explains Yip.

The Cross-boundary Wealth Management Connect Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area came into being in September 2021. It allows eligible mainland, Hong Kong and Macao residents in the Greater Bay Area to invest in wealth management products distributed by banks in each other’s markets through a closed-loop funds flow channel established among their respective banking systems.

“There is a huge demand for wealth management in the Greater Bay Area,” says Jasper Yip, partner of Oliver Wyman. A survey conducted by the firm in the Greater Bay Area shows that a large portion of investors prefer foreign products, with about 66 percent of them choosing them over local products when risks and returns are similar, he says. “The scheme has demonstrated the capability to move to a broader variety of products and cater to wider investment choices,” he says.

The market access programs have come a long way in strengthening financial complementarity among mainland cities in the Greater Bay Area and Hong Kong, acknowledges Jasper Yip. The myriad of opportunities created by the connect programs will inspire Hong Kong banks to consider leveraging markets in the region to develop their next generation of talent, infrastructure and ecosystem partnership, he says.

There is also the upcoming Swap Connect — a program between Hong Kong and mainland interbank interest rate swap markets. It has been hailed by investors at home and abroad who are keen to trade in cross-border interbank derivatives markets.

E Zhihuan from the Bank of China calls it a welcome start that “provides a direction for the further opening-up of domestic financial markets and relaxation of restrictions on foreign institutional investors’ participation in onshore financial derivatives markets”.

With RMB internationalization set to scale new heights, she expects Hong Kong to maximize its influential capacities to improve market operations, activate market demand for the Chinese currency, increase global RMB cash flow, and help overseas investors secure a stake in RMB assets.

Contact the writer at jenny@chinadailyhk.com

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