10 Years of Connectivity!

The 10th anniversary of connectivity has been fruitful

China Fund News reporter Zhang Yanbei

Recently, the Stock Connect between Hong Kong and the Mainland marked the 10th anniversary of the Stock Exchange.

On April 10, 2014, the China Securities Regulatory Commission (CSRC) officially approved the Shanghai Stock Exchange and the Hong Kong Stock Exchange to launch a pilot scheme for the Shanghai-Hong Kong Stock Connect, referred to as Shanghai-Hong Kong Stock Connect, marking the beginning of the "era of mutual access" between the Hong Kong and mainland stock markets. In November of the same year, stocks under the Shanghai-Hong Kong Stock Connect began to trade, and a "capital line" officially connected the north and south. Today, the interconnection mechanism has been in operation for 10 years.

In the past decade, the Stock Connect Mechanism has achieved fruitful results, laying a solid foundation for the integration and development of the two markets. This mechanism has become a model of high-level financial opening-up, enhanced the international attractiveness and competitiveness of the market, and promoted the common development of the economies of the two places. At the same time, the interconnection has also affected the internationalization of investment concepts and strategies, injected new vitality into the two markets, and promoted the high-quality development of the capital market.

The high-level opening-up has promoted the in-depth integration of the capital markets of the two places

As the world's first two-way capital market opening model, the 10th anniversary of Stock Connect has made remarkable achievements, effectively promoting the integration and development of the capital markets of the Mainland and Hong Kong, effectively enhancing the international attractiveness and competitiveness of the two markets, promoting the common development of the economies of the two places, and providing more abundant and convenient investment channels for domestic and foreign investors.

Looking back on the achievements of the mutual access in the past decade, Luo Guoqing, head of the index investment department of GF Fund, said that the mutual access of the financial markets between the mainland and Hong Kong is a vivid embodiment of the mainland's orderly expansion of high-level financial opening-up. In particular, the successive launch of "Shanghai-Hong Kong Stock Connect", "Shenzhen-Hong Kong Stock Connect", "Bond Connect" and "ETF Inclusion in Stock Connect" has greatly promoted market integration and development.

"First of all, the mechanism realizes the exchange of stock resources between the two places, so that more high-quality listed companies can be discovered by cross-market investors and reasonably priced, which will help to give full play to the price discovery function of the capital market, enhance the international competitiveness of the two markets, and also help promote the common development of the two economies. Second, connectivity will help strengthen regulatory co-operation between the two places, maintain market stability and enhance international credibility. This mechanism not only provides more investment opportunities for investors in the two markets, but also helps to promote liquidity and improve investment efficiency in the two markets. "In addition, in order to attract more international institutions to participate in investment, the two markets need to continuously improve their regulatory systems and trading rules to align with international standards, which will help enhance international competitiveness." ”

Xing Cheng, former manager of the Hang Seng Stock Connect Select Mixed Fund, also believes that the Stock Connect mechanism has enhanced the international influence of the overall mainland capital market. Since the launch of Stock Connect in 2014, mainland investors have played an increasingly important role in the Hong Kong market, with the cumulative net inflow of southbound trading rising to nearly RMB2.7 trillion in April this year. With the increasing importance of the southbound channel in the Hong Kong stock market, the liquidity and trading activity of the Hong Kong market have been further enhanced, which is extremely important for the stability and healthy development of the market, and at the same time enhances the anti-risk ability of the Hong Kong market. In addition, through the Stock Connect mechanism, the settlement and use of RMB in the capital market has gradually increased, which has promoted the internationalization of RMB.

"Over the past decade, Stock Connect has significantly increased the visibility of the Chinese market in the international financial system, increasing the willingness and ease of overseas investors to invest in China. Xu Tingquan, deputy director and fund manager of the overseas equity investment department of HSBC Jinxin Fund, gave an example, "The original QFII qualification application was cumbersome and restrictive, but in 2014, the Stock Connect mechanism simplified the A-share investment process, relaxed the quota, and enriched the investment list of global institutional investors. Overseas investors were able to gain direct exposure to A-shares and enjoy wider industry diversification. In particular, after the introduction of the STAR Market, semiconductors and new economic opportunities have attracted foreign investment, enhancing the attractiveness of China's innovation sector. At the same time, the Hong Kong Stock Connect enriches the investment options of mainland investors, provides valuation advantages and dividend opportunities, and makes the layout of mainland investors more complete. ”

CSOP said that the launch of the interconnection has strengthened Hong Kong's status as an international financial center, brought "north water" to Hong Kong's capital market, provided new investment channels and targets for mainland investors, and greatly facilitated foreign investment in the mainland market.

Stabilize the word first, and build a cross-border investment mechanism step by step

Over the past decade, the interconnection mechanism has been continuously explored and optimized, and has undergone a process of orderly and steady progress. Through continuous exploration and innovation, the two markets have gradually established an efficient and stable cross-border investment mechanism, setting an example for the high-level opening up of China's capital market.

CSOP concluded that over the past decade, Shanghai and Shenzhen have worked together to continuously improve the mutual access mechanism, implementing a series of reform measures such as abolishing aggregate quota restrictions, increasing daily quotas, broadening the scope of underlying categories and securities, establishing a Northbound Investor Identification Number (Northbound Investor Identification (ID) and Southbound Investor Identification (ID) system, and optimising the trading calendar. As of the end of March 2024, Stock Connect securities accounted for more than 90% of the market value of the A-share market, and Hong Kong Stock Connect securities accounted for more than 80% of the market value of the main board of the Hong Kong Stock Exchange.

Luo Guoqing said that from the listing of A+H shares to the opening of Stock Connect, the mainland and Hong Kong markets have created a new model of cross-border securities investment. In this process, the two-way flow of funds has gradually increased, and the Hong Kong market has become an important window for all parties to meet. Throughout the development process of the two-way interconnection mechanism, it can be found that the target of the mutual access is expanding one after another, and the investor structure focuses on attracting long-term institutional investors such as QFIIs first, and then introducing individual investors, which is conducive to the risk control of the mainland capital market.

"Specifically, the varieties and scope of the interconnection continue to expand and optimize, and the varieties have gradually expanded from the initial stock trading interconnection to bonds, futures, funds, especially ETFs and other fields, providing investors with richer investment choices. Taking ETFs as an example, since the official implementation of ETF Connect in July 2022, the number of included products has steadily expanded and the variety has become richer in less than two years. He said.

Xu Tingquan said that in the past decade, the Stock Connect mechanism has been a process of continuous improvement, in which market participants, rule-makers and policy promoters have continuously improved the entire operating structure through continuous learning, reference, innovation and trading. In addition to stocks and bonds, mutual recognition of ETFs and wealth management products will be gradually liberalized, and REITs and financial derivatives are expected to be included in the future. The inclusion of the RMB counter in Shanghai-Hong Kong Stock Connect is expected to reduce the risk of exchange rate fluctuations, simplify settlement, and enhance market liquidity and investors' willingness to participate.

Talking about the development process and experience of the mutual market between Hong Kong and the mainland in the past decade, Xing Cheng said that the mainland has explored a high-level financial opening-up path with controllable risks through the two-way interconnection mechanism. From the pilot project to the full opening up, the product category has been continuously expanded, which not only actively explores forward, but also controls risks and ensures the smooth operation of the capital market. This process has a positive impact on the deepening development and internationalization of the financial sector, and enhances investor confidence.

Mastery

Investment philosophies and strategies are becoming increasingly international

Over the past decade, Stock Connect has not only provided strong support for the integration and development of the Mainland and Hong Kong markets, but also profoundly influenced the investment philosophy and investment strategies of institutional investors.

Huang Chengyang, equity fund manager of Taikang Fund, said bluntly, "Through the Hong Kong Stock Connect, many public funds, including us, have started their overseas investment journey, and their investment concepts and strategies have collided and verified each other with overseas institutions. ”

Huang Chengyang introduced, "Investing in Hong Kong stocks means integrating into global investment, and it is necessary to have an understanding and prediction of global macro policies. When judging industries and companies, we should pay more attention to the value and return in a stable state. With the new stage of China's economy, Hong Kong stock investment has shifted from fully sharing growth dividends to pursuing stable returns, focusing on the long-term value of the company, so as to achieve long-term appreciation of investors' assets. ”

Xing Cheng pointed out that with the increase in the proportion of southbound capital transactions in Hong Kong Stock Connect, investors' investment strategies have shifted from technology growth to high dividend dividends. The high-dividend style focuses on full income and stable returns, which is suitable for an environment of declining interest rates and slowing economic growth. Through Stock Connect, mainland investors have gradually embraced shareholder return strategies such as share buybacks and dividends, which are in line with the mainstream concepts of developed markets. Stock Connect promotes the opening up of the capital market in terms of capital flows, and also shortens the distance between the mainland and the rest of the world in terms of investment concepts.

Xing Cheng said that this strategic shift reflects the maturity of the mainland market and the internationalization of investors' ideas, which will help the market develop steadily and provide investors with stable returns. In the future, with the deepening of connectivity, the concept of investors will be further integrated to promote the high-quality development of the capital market.

Mr Hui said that with the launch of the Stock Connect mechanism, mainland investors and overseas investors have more opportunities to interact directly and indirectly, and have enhanced their understanding of the differences between different investment mindsets nurtured by different markets.

"Working in foreign institutions has made me adept at identifying long-term structural growth opportunities. However, the A-share market is a diverse and volatile investor that is significantly affected by short-term sentiment. We always seek to find long-term investment opportunities in the economic transition, capture the poor market perception, and create alpha returns for investors. In view of the characteristics of A-shares, we will also appropriately participate in short-term thematic investments with good fundamentals to achieve a more stable investment strategy. He said.

Favorable policies have promoted the rapid strengthening of Hong Kong stocks

The industry is optimistic about the return of the medium and long-term value of Hong Kong stocks

China Fund News reporter Lu Huijing

Since the beginning of the year, the policy of optimizing the cross-border interconnection mechanism has been positive, stimulating the enthusiasm of Hong Kong stocks to go long.

As of May 3, the Hang Seng Technology Index and the Hang Seng Index rebounded by 33.05% and 24.89% respectively from the low point of the year, entering a technical bull market. Since the beginning of this year, the inflow of southbound funds into the Hong Kong stock market has also accelerated significantly, with the cumulative inflow reaching HK$213.502 billion in the first four months, far exceeding the level of the same period in the last two years.

A number of industry insiders said that the introduction of the five cooperation measures with Hong Kong will help smooth the mutual access mechanism, introduce capital into the Hong Kong capital market, and further enhance the liquidity of Hong Kong stocks. In the long run, the Hong Kong stock market with attractive valuation and growth is still a good investment choice for funds seeking global allocation.

The five capital market co-operation measures with Hong Kong are expected to further invigorate the Hong Kong stock market

On the occasion of the 10th anniversary of the opening of the Stock Connect between the Mainland and Hong Kong, the policy "gift package" has been ushered in.

On April 12, the State Council promulgated the new "Nine Measures", proposing to expand and optimize the cross-border interconnection mechanism of the capital market, and on April 19, the China Securities Regulatory Commission (CSRC) issued five measures for capital market cooperation with Hong Kong, further expanding and optimizing the Stock Connect mechanism, helping Hong Kong consolidate and enhance its status as an international financial center, and jointly promote the coordinated development of the capital markets of the two places.

In the view of Xu Tingquan, deputy director and fund manager of the overseas equity investment department of HSBC Jinxin Fund, this measure is the right medicine and timely puts forward improvement plans for the current problems such as the decline in liquidity and financing attractiveness of Hong Kong stocks. In the medium to long term, a wider range of trading products will provide more choices for both southbound and northbound investors, which is expected to further promote the long-term integration of the capital markets of the two places.

Luo Guoqing, head of the index investment department of GF Fund, pointed out that the above measures can promote a freer flow of capital, products and information between the two markets and promote the integration process of the two markets. By increasing investment options and channels, financial institutions are encouraged to participate in more financial product innovation to meet the diversified investment needs of investors. In addition, this will have a positive significance and far-reaching impact on strengthening the capital market ties between the mainland and Hong Kong, promoting the process of RMB internationalization, and promoting deeper market connectivity.

Xing Cheng, manager of the former Hang Seng Stock Connect Select Mixed Fund, also believes that this policy support is a targeted response to the new changes and challenges faced by the Hong Kong stock market in recent years. For example, there is insufficient market liquidity, the attractiveness of financing is declining, and the scope of investment for mainland investors is limited. "First of all, it will fully reflect the central government's support for Hong Kong and boost the investment confidence of domestic and foreign investors; second, it will bring more liquidity to the Hong Kong stock market and further invigorate the Hong Kong stock market; finally, from enriching the supply of investment products to encouraging leading enterprises to list in Hong Kong, it will help enhance Hong Kong's international competitiveness, attract more international capital to Hong Kong, strengthen and enhance Hong Kong's status as an international financial center, bring new vitality and growth points to Hong Kong's capital market, and accelerate the integration of the mainland capital market with the international market. ”

Sin Sujun, chief analyst of Bloomberg Industry Research ETF Asia Pacific, is particularly concerned about the impact of this policy on Hong Kong Stock Connect ETFs. She said that the Hong Kong Stock Connect ETF is one of the channels for mainland investors to invest in Hong Kong ETFs. At present, there are only eight funds in the list of Hong Kong Stock Connect ETFs, and if the above new requirements apply, it is estimated that another seven Hong Kong-listed funds may be included soon. In addition, the channel is expected to attract at least US$5 billion to US$10 billion in inflows over the next two years.

Hong Kong stocks have performed strongly recently, and the industry is optimistic about the return of Hong Kong stocks in the medium and long term

Recently, with the support of news and capital, Hong Kong stocks have rebounded rapidly.

Wind data shows that as of May 3, the Hang Seng Index and the Hang Seng Technology Index closed at 18,475.92 points and 3,971.29 points respectively, rebounding 24.89% and 33.05% respectively from the low point of the year.

Southbound funds are also accelerating their inflows into the Hong Kong stock market, with a cumulative inflow of HK$213.502 billion in the first four months of this year, nearly doubling compared with the same period in 2022 and 2023.

Although there are still uncertainties in the short term, such as the uncertainty of the timing of the Fed's interest rate cuts, many interviewees are still optimistic about the long-term performance of the Hong Kong stock market.

Huang Chengyang, manager of Taikang Fund Equity Fund, said that in the short term, Hong Kong stocks have just experienced a long period of investment headwinds, resulting in the valuation of Hong Kong stocks, especially the valuation of some high-quality sectors with good fundamentals at a historical low, but at the same time, the targets of these subdivisions are not only stable operations, but also strengthening dividend buybacks and other measures to improve investor returns.

In particular, Luo Guoqing pointed out that Hong Kong stocks have always been a market where "liquidity focuses on foreign capital, and fundamentals look at the mainland", that is, its valuation depends on the two dimensions of EPS determined by China's fundamentals and PE determined by overseas liquidity.

As for overseas liquidity, the market's expectations for the Fed's mid-year interest rate cut are stronger, but due to the strong resilience of the U.S. fundamentals, the probability of an early interest rate cut is very low, and the expected rate cut will not be too large, and short-term investment is mainly concerned about the domestic economic recovery. The current policy continues to release positive support for the overall trading sentiment, but whether a trend is formed still needs to observe the strength of the policy and the degree of realization of the fundamentals. In the long run, under the continuous catalysis of the policy, southbound funds may be expected to continue to flow into the Hong Kong stock market, continue to enhance the voice in the Hong Kong stock market, and promote the return of the value of Hong Kong stock financial assets in the medium and long term. Luo Guoqing further analyzed.

J.P. Morgan Asset Management's senior global market strategist in China, Jiang Xianwei, emphasized that the valuation of Hong Kong stocks has become attractive in the global horizontal comparison. "Recently, under the further confirmation of China's economic recovery, market sentiment has warmed, and funds have returned. In the medium term, the U.S. economy is still facing risks such as weakening consumption, high interest rates dragging down real estate and corporate earnings, and the Fed's interest rate cut may be more likely to be postponed rather than not, and it is expected that after the Fed starts the interest rate cut cycle within the year, the weakening of the US dollar may drive further capital back to Asia, Hong Kong stocks and A-shares are expected to benefit, and Hong Kong stocks may appear more upward elasticity under factors such as liquidity and trading system; in the long run, China's economy is expected to continue to rise, providing macro fundamental supportIndustry leaders and high dividends listed on the Hong Kong stock market are expected to attract the continued attention of domestic and foreign funds. ”

"Many leading technology companies in subdivided fields have their main business in China, but most of them are not listed on the A-share market. Liu Fan, fund manager of IB Hong Kong Stock Technology ETF, suggested that investors should fully grasp investment opportunities from the perspective of complementarity between the Hong Kong stock market and the mainland market.

Heading towards the next 10 years

All parties will work together to further deepen the connectivity mechanism

China Fund News reporter Fang Li

Shanghai-Hong Kong Stock Connect was launched in 2014, Mutual Recognition of Funds in 2015, Shenzhen-Hong Kong Stock Connect in 2016, Bond Connect in 2017, Cross-boundary Wealth Management Connect in 2021, ETF Connect in 2022 and RMB Dual Counter in 2023...... Over the past 10 years, Hong Kong's market connectivity has evolved from stock access to full market connectivity, which has amazed the world.

It can be said that in the past 10 years, the interconnection between the mainland and Hong Kong has not only been the trend of the times, but also a reflection of the internationalization of RMB in the capital market. Looking forward to the next 10 years, many industry players have put forward their own suggestions on stimulating the vitality of the Hong Kong market, further deepening the mutual access mechanism, and promoting win-win cooperation between the two places.

Deepen the interconnection mechanism in multiple dimensions

In terms of further deepening the mutual access mechanism, many industry insiders have proposed the introduction of more product categories, relaxation of trading restrictions, and simplification of the transaction process.

Liu Fan, fund manager of Xingyin Hong Kong Technology ETF, said that the first is to add more asset classes when the conditions are right. At present, Stock Connect already includes stocks and ETFs, and consideration can be given to introducing more types of financial instruments such as bonds and options to increase the liquidity and depth of the market; second, to enhance mainland investors' understanding of the Hong Kong market through education and publicity activities, and to simplify the procedures and requirements for investors to participate in the Stock Connect mechanism, so as to attract more retail and institutional investors; third, to strengthen the development of cross-border renminbi financial products and services, such as renminbi-denominated bonds and funds, as the internationalisation of renminbi progresses. This will help the Hong Kong market strengthen its position as an offshore RMB centre, while also facilitating cross-border investment by mainland investors.

"In the future, first, we can consider including more types of financial products in the Stock Connect mechanism, such as options, to enrich investors' choices; Third, we will continue to simplify the trading process of Stock Connect, such as optimizing the cross-border fund clearing and settlement mechanism, shortening the transaction cycle and improving trading efficiency, and fourth, we can deepen the interconnection between the markets of the Mainland and Hong Kong, and actively carry out capital market cooperation with other countries and regions to promote the cross-border flow of capital, technology and information. Luo Guoqing, head of the index investment department of GF Fund, also said.

Similarly, Xu Tingquan, deputy director of the overseas equity investment department of HSBC Jinxin Fund, suggested that he hopes to consider shortening the review time for new shares under certain conditions, and that the review criteria for access may be appropriately relaxed in the future, and that the entry criteria for non-Chinese enterprises will be further relaxed to make the Hong Kong Stock Connect more diversified, and that when the time is ripe in the future, it may be possible to consider further liberalizing the access of financial derivatives so that investors can have more tools to hedge risks.

"By continuously expanding and optimising the existing Stock Connect mechanism, we may be able to further enhance the attractiveness and vitality of Hong Kong's capital market, such as exploring the inclusion of returning secondary listing enterprises in the scope of investment under the Stock Connect, which can help overseas listed domestic enterprises effectively manage the risk of geopolitical factors on the one hand, add more high-quality targets and enhance trading activity for Hong Kong's capital market on the other hand, and optimize the tax arrangement for dividends and dividends under the Stock Connect mechanism. Xing Cheng, former manager of the Hang Seng Stock Connect Select Mixed Fund, also has his own suggestions.

Xing Cheng said that the dividend tax on dividends and dividends for mainland investors investing in Hong Kong stocks through the Hong Kong Stock Connect is 20% or more (depending on the investment target), which is quite different from the stepwise downward taxation of A-shares. This will not only further enhance the overall attractiveness and liquidity of the Hong Kong stock market, but also encourage long-term capital investment, provide more convenience to long-term institutional investors, and avoid the risk of market volatility that may be brought about by short-term capital flows.

We will continue to promote win-win cooperation between the two places and optimize high-level two-way opening-up

Institutional figures also offered suggestions on continuing to promote win-win cooperation between the two places and promoting the optimization of the high-level two-way opening up of the capital market.

"We can continue to optimize the trading mechanism, strengthen investor education and protection, strengthen coordinated supervision, and relax foreign investment access. Luo Guoqing suggested from many aspects, such as on the basis of the existing Shanghai-Shenzhen-Hong Kong Stock Connect mechanism, to further explore new interconnection models, such as expanding trading varieties, optimizing trading rules, improving trading efficiency, etc., to promote the innovation and improvement of the capital market interconnection mechanism. At the same time, it will reduce cross-border transaction costs and enhance market attractiveness. In addition, it can also establish and improve the investor protection mechanism, strengthen the protection of investors' rights and interests, and at the same time enhance investors' risk awareness and investment capabilities, and promote the healthy development of the market.

Regarding the liquidity problem and investor protection of Hong Kong stocks, Xing Cheng believes that on the basis of fully assessing the suitability of investors, we can consider further relaxing the access conditions for investors to facilitate investors to participate in the interconnection. At present, the overall liquidity of Hong Kong's capital market, the daily trading volume of the Hong Kong stock market, and IPO financing are all under pressure. On 29 August 2023, the HKSAR Government announced the establishment of a "Task Force on Enhancing Liquidity in the Stock Market" to conduct a comprehensive review of the factors affecting the liquidity of Hong Kong stocks.

"After nearly a decade of exploration and development, mainland investors have become more familiar with the Hong Kong Stock Connect mechanism, and the regulatory cooperation between the regulators of the two places has become more mature, as well as the arrangements for investor protection. Xing Cheng said that further relaxation of investor access conditions for mutual access can inject more liquidity into the Hong Kong market, and help strengthen the overall competitiveness of Hong Kong's financial market, so as to attract more high-quality enterprises and investors to participate in investment and financing activities in Hong Kong. Relaxing the access conditions for investors will also provide investors with more choices and opportunities, promote the globalization process of the financial market, and achieve the sustained stability and healthy development of the financial market.

Xu Tingquan suggested that due to the change of investor structure and changes in the macro environment, the current trading activity of the Hong Kong stock market has declined, and it is expected to improve the liquidity of the Hong Kong stock market by increasing the introduction of southbound funds. At the same time, it will also allow mainland investors to share more investment opportunities that are relatively scarce in the mainland. Therefore, in the future, we can further strengthen the publicity and investor education of Hong Kong stocks, Hong Kong markets and Hong Kong stock funds, so that more mainland investors can fully know and understand the Hong Kong stock market and share the investment opportunities of Hong Kong stocks.

Many financial institutions in Hong Kong have also indicated that they will give full play to their own advantages to promote the high-level two-way opening up of China's capital market.

CSOP said bluntly that it looks forward to providing investors with more ETF products in the future to help investors diversify their asset allocation. At the same time, it will give full play to its own advantages, actively explore market opportunities along the "Belt and Road", provide diversified ETF products, and help the high-level two-way opening of the mainland capital market.

Editor: Xiao Mo

Review: Muyu