The Inception of Cross-Market Stock Investment in China and Hong Kong

The new-established administration in China is ambitious to progress structure reform for sustainable growth. With the claim that the market force will be allowed to play a fundamental role in the overall economy, a key task on the to-do list is the opening-up of its strictly controlled capital markets.

Recently, the country made a big move by initiating the so-called Shanghai-Hong Kong Stock Connect, a pilot program of cross-market stock investment. It allows mainland investors to trade shares of select companies listed in Hong Kong, while permitting Hong Kong investors to trade designated stocks trading in Shanghai. More specifically, investors in Hong Kong can plow up to 13 billion yuan ($2.1 billion) a day into mainland shares, with a maximum of 300 billion yuan. Mainland investors can send up to 10.5 billion yuan a day to Hong Kong, capped at 250 billion yuan. Purchases will be limited to dual-listed stocks and designated blue-chips, and mainland participants will initially have to be either institutional investors or retail investors with 500,000 yuan ($80,650) in securities and cash.

The inception of the program significantly boosted the two markets, with the Shanghai Composite Index ending the day up 1.4%, the biggest gain in the region, and Hang Sang Index (Hong Kong) climbing 1.5% to its highest close since Jan. 2. Both markets are rebounding after sharp falls in the first quarter on concerns of China’s economic slowdown.

Definitely, the cross-border integration will be a mutually beneficial cooperation for both China and Hong Kong.

On the side of China, the Shanghai market has been long-depressed shown by the negative year-to-date performance of the Shanghai Composite. The program will inject vigor into the bear market by introducing foreign capital. In particular, since shares of companies dual-listed in Shanghai and Hong Kong are usually cheaper in Shanghai, mainland investment will be appealing to global investors who can easily trade those dual listed companies in Hong Kong.

On the side of Hong Kong, Hong Kong Exchanges and Clearing Ltd (HKEx) has been struggling to lift trading volume and further capitalize on China’s growing opportunities, despite that the market has comparative advantage of mature accounting practices and transparent regulations. As mainland investors are set to invest in iconic Chinese companies listed in Hong Kong such as Lenovo and Tencent, Hong Kong’s role as the primary gateway to China will be strengthened along with increasing market confidence.

In the long run, the move is expected to push forward the internationalization of the Chinese yuan and bolster Hong Kong’s position as an offshore yuan center by integrating capital domestically and internationally.

2 thoughts on “The Inception of Cross-Market Stock Investment in China and Hong Kong

  1. bdinger

    This is quite interesting, it seems as if China is finally realizing that they arent going to be able to get away with the market manipulation they have been enforcing for the last 20+ years and experience the same type of growth they have been used to.

  2. ajsanna

    Interesting post. I wonder what effect cross listing will have on growth for companies as well as trading volume. This move clearly makes it easier to invest across different Chinese markets, but does it have any other substantial benefits?

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