Stock Connect could be replicated by other Asian exchanges, omitting Hong Kong

Charles Li, the CEO of Hong Kong Exchanges & Clearing, believes stock exchanges in Japan, Taiwan and elsewhere may be forming plans to set up their versions of the Shanghai-Hong Kong Stock Connect.

Stock exchanges in Japan, Taiwan and elsewhere may be forming plans to set up their versions of the Shanghai-Hong Kong Stock Connect, in order to link their bourses to those of mainland China.

The integrated structure of the Shanghai- Hong Kong Stock Connect can be used by other jurisdictions. Charles Li, the Chairman of Hong Kong Exchanges and Clearing (HKEx) likens the structure to a ‘computer chip’ in the metaphorical sense that a diagram of the Stock Connect’s mechanism appears to emulate that of a self-contained silicon circuit.

A by-product of the robustness of that methodology is that it can be copied by other exchanges who want to forge direct links with Shenzhen and Shanghai.

“Everybody wants to go into China now. Everybody wants to replicate the Stock Connect,” said Li, in a lunchtime speech to reporters on Tuesday in Hong Kong.  

That said, Li does not object to the prospect of competition, figuring that if other exchanges put together an offering, “Hong Kong will be five years down the road”.

By that, he means expansion of the mutual market model to incorporate a new Shenzhen-Hong Kong Stock Connect, and inclusion of new products, such as fixed income, currency, equity derivatives, international equity and commodities. HKEx is also looking into building a connect system with one of China’s derivatives exchanges, although Li thinks this will take a longer time to work out due to systems and risk management issues.

How then can the Hong Kong market stay relevant to China, to keep its version of the Stock Connect in pole position?

“China trusts Hong Kong more than anywhere else, because of culture, one country and all the great achievements of Hong Kong people in the last 20 years.” He also considers that Hong Kong has the edge regulation-wise.  “I don’t want to pass judgment that the CSRC won’t trust anyone else, I’m sure they will, but I’m sure they trust Hong Kong’s Securities and Futures Commission a lot more.”

“There are no intellectual property rights on the Stock Connect, no patent. It’s all published. Everybody’s talking <to the Shanghai Stock Exchange>, but if you were Shanghai,  do you want to open another market or would you want to make the open market a lot bigger, a lot more efficient and make it more impactful first? I would have chosen the second, but I’m sure they should be talking to everybody.”

Hong Kong’s turnover is dwarfed by that of the Shanghai and Shenzhen Exchanges. The average daily turnover in 2014 for the combined mainland exchanges was RMB 303 billion per day, compared to Hong Kong’s HK$69 billion per day.

“Eventually, China will be free enough that everyone will be able to go in directly,” said Li. “That’s ok. But for people who do not want to go in and open an account, they can still sit at home and trade with what is already available. It is up to Hong Kong to figure out what product we can put in what traders need.”