Stock Connect prompts China to open up markets

Reforms to China's bond market since the introduction of Stock Connect raise hopes of further market liberalisation.

Market liberalisation in China is gaining momentum following changes around accessing the Interbank Bond Market (CIBM) and developments on the Hong Kong-Shanghai Stock Connect initiative.

CIBM reforms in 2015 enabled large foreign institutions such as central banks, financial organisations and sovereign wealth funds (SWFs) to invest into China’s $6.98 trillion (at year-end 2015) domestic bond market. The rules also allow institutions to trade interest rate swaps, forward contracts and bond repurchase agreements without pre-approval from the People’s Bank of China, and a much more streamlined registration process. 

The scheme has now been extended to other financial institutions including insurers, commercial banks, securities firms and asset managers. “The rules are much welcome. However, hedge funds are not permitted into the CIBM yet as the Chinese regulator has said it would prefer long-term investors on CIBM,” said Patrick Wong, head of China sales and business development at HSBC Securities Services, speaking at Fund Forum Asia 2016 in Hong Kong. 

This comes as China seeks to internationalise the RMB and encourage inward investment following the intense market volatility in 2015 and January 2016. The move has been welcomed by a number of international investors. 

Meanwhile, there have been a number of exciting developments on Stock Connect, added Wong. Same day Delivery Versus Payment (DVP) has been introduced. This should help facilitate further investment into China A Shares by regulated fund managers. China’s settlement time for cash is T+1 while its settlement time for securities is T+0 whereas Hong Kong is T+2 for both cash and securities settlement, meaning trades have to be pre-funded. Same day DVP negates this counterparty risk which should make it easier for UCITS to gain China exposure. Nonetheless a number of custodian banks had created account structures to mitigate the trade settlement risk. 

It is also increasingly likely that Stock Connect will be extended to Shenzhen’s stock exchange, which lists a number of smaller mainland companies. “The precise date is still unknown but we are waiting for the announcement,” said Wong. 

There is speculation Stock Connect could be extended to the UK. “The regulators are in the discussion phases and they are trying to work out how to overcome the operational complexities,” commented Wong. These include issues around clearing and settlement due to the time-zone differences, as well as Chinese curbs on short-selling.