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Making Connections

Published in Automated Trader Magazine Issue 36 Spring 2015

The Hong Kong Shanghai Stock Connect is a significant step forward for Chinese markets, and a move in a larger strategy for China to open up its capital account and to internationalise its currency, the renminbi, writes Peter Barker.

Charles Huang, CEO, Bond Trust

The Connect opening heralds a major change in Chinese market structure. The combined market cap of the two largest mainland China stock exchanges -- Shanghai and Shenzhen -- together with the Stock Exchange of Hong Kong is $7.5 trillion, $0.2 trillion larger than the NASDAQ. When realised, the total listed market cap of these three linked exchanges would be the second largest in the world, behind only the NYSE.

Charles Huang, CEO of Bond Trust, a China-focused asset management company based in Hong Kong, said that so far the impact of the Stock Connect has been small in terms of the percentage of the total quota being used, but it represented an early step on the longer road of RMB internationalisation.

"For the capital account this is one of the first few tests the government is using in trying to internationalise the RMB. So by opening up the Stock Connect the capital flow will be more mobile and the RMB will be more open to the international investors," he said. "Even though the trading activity is not very big, the long term impact is pretty decent in terms of trying to internationalise the currency."

Leung, the author of a new book "The Tides of Capital" about the financial crises of the 1990s and 2008 published by OMFIF (Official Monetary and Financial Institutions Forum), also reiterated the role of the Connect as part of RMB internationalisation.Julia Leung, a former undersecretary for financial services and the Treasury with the Hong Kong government, currently the executive director of the investment products division at Hong Kong's Securities and Futures Commission (SFC), was deeply involved in setting up the Stock Connect.

Moreover, far from disappointing Chinese officials, its gradual start is a good sign, both for the Connect itself and for the further implementation of policy.

"The Stock Connect is still underutilised, I fully agree, but this is the way to go. It is important that you have this platform and I have a lot of confidence that institutional investors overseas will use this because it is a much more convenient channel to bring portfolio investment onto the mainland and vice versa.Leung said, "Stock Connect is part of the pilot, HK is being used as the pilot for the opening up or liberalisation of China's capital accounts.

"The pilot is working well, in the sense that there is no huge exuberance. The lack of exuberance is actually a very good sign, people are actually level headed about their investments. There is no rush into Hong Kong stocks from the mainland.

"This kind of exuberance is something that we would like to avoid. As long as it is orderly the channel is always there. You do not have to rush to get in, and it will not close up."

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