Roll-on Stock Connect for London and New York

Rivals to the current Stock Connect could come from far afield, as leading Asian buy- and sell-siders meet to evaluate the way forward on the new trading link.

Other global exchanges have been conjectured to be talking to China about setting up a link similar to the Shanghai-Hong Kong Stock Connect.

It was a view expressed orignally by the CEO of Hong Kong Exchanges and Clearing (HKEx), Charles Li, during February.

He didn’t name any possible candidates, although regional exchanges such as Tokyo, Singapore, Taiwan seemed logical.

China’s net though could be spread wider than Asia’s confines, tapping more directly into bigger pools of capital than Hong Kong’s.

“If you look at renminbi deposits offshore, New York and London would be natural,” said Andrew Maynard, head of global trading at CLSA. “I would find it amazing if the NYSE and LSE are not way down the line with conversations with China in terms of Connect. I would find it incredible if they hadn’t been.”

He was speaking at a roundtable held in Hong Kong, hosted by CLSA and featuring some of Asia’s leading buy-side traders.  He explained that mainland Chinese authorities had been perceiving offshore renminbi as a challenge to be solved, and mindful of that, the Connect had been devised as a mechanism to move the currency.

“So it is not about equity, it is about currency. You can pretty much see logically where the other exchanges are going,” said Maynard. “Maybe this is the start of a greater China exchange. It could be, if you look at the A/H volatility and pricing which is so ridiculous when you think about it, why have two share prices?  To me, B shares will be the first thing that will go as a by-product of the Connect, which would be fantastic. If you think trading the A’s is bad you should try trading the B’s.”

The trading model that rival Stock Connects would use is likely to be the same one that is used on today’s Hong Kong prototype. HKEx concedes that there is no copyright on that mechanism – and whilst there remain some problems, it appears to works well.  Recognising that business between foreign exchanges and Shanghai might poach trades from Hong Kong, Charles Li added that he didn’t mind such competition, as Hong Kong would simultaneously be taking the Stock Connect in other directions.  Ultimately the end-game, which we are still some way from, is direct ownership of A shares.

“So is this an interim model? Said Matthew Saul, head trader, Asia Pacific, Fidelity Worldwide Investments, during the roundtable. “We are all direct owners of assets onshore in the markets we invest in. It takes time but we get there eventually, like the markets evolve but from my perspective theoretically the long term perspective is that we will eventually own direct equities in China,”

So far, the buy-side is satisfied with the access provided by the Stock Connect, even those which were not able to be involved from Day One.

“Will this be successful in the next 6 to 12 months?” said George Molina senior vice president, director of Asian trading, Franklin Templeton Investments, (Asia), which was one of those firms that was not able to participate on Day One. “We would think it will be and if we go around and speak to many of our peers, they will probably say the same thing, so although we are having a few complications on ownership rules and settlement which we hope will be sorted and allow for all side lined investors to participate.”