Highlights after domestic and HK stock markets see connection

China Securities Regulatory Commission (CSRC) and Securities & Futures Commission (SFC) of Hong Kong stated in a joint announcement at 19:00 of Nov. 25 that eligible stock trading via Shenzhen-Hong Kong Stock Connect will start on Dec. 5.

Together with Shanghai-Hong Kong Stock Connect which was introduced on Nov. 17, 2014, A-share market and Hong Kong stock market will see interconnection. The author thinks that following the simple and clear short names for Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, the two stock markets with interconnection can be called as domestic-Hong Kong stock connect. Attention can be paid to three highlights after domestic -Hong Kong stock connect is realized.

First of all, international status of A-share market will be improved greatly.

After Shanghai-Hong Kong Stock Connect was introduced two years ago, Shenzhen-Hong Kong Stock Connect is to kick off soon. Successful launch and stable operation of Shanghai-Hong Kong Stock Connect not only paves way and accumulates experiences for connection of exchanges and also inspires passion of global exchanges in connection. World Federation of Exchanges (WFE) calls Shanghai-Hong Kong Stock Connect as a new trend of interconnection of exchange industry.

Cooperation on connection is under exploration and conduction in recent two years. Shanghai Stock Exchange (SSE), Deutsche Börse AG and China Financial Futures Exchange signed an agreement in Beijing in October 2015 that they would invest 200 million yuan to jointly establish a new company named China Europe International Exchange (CEINEX).

Chinese and French governments came to an agreement at the third China-France High Level Economic and Financial Dialogue in 2015 that they both welcomed Shanghai Financial Service Office and Paris Europlace to accelerate cooperation on financial centers, stock markets, asset management banking industry and insurance. It is interpreted by the market as cooperation foundation for Shanghai-Paris stock connect.

British Finance Minister Philip Hammond indicated on Nov. 10 that as China’s first stock connect program with foreign country, Shanghai-London stock connect will enter next stage. Chief Executive Officer of London Stock Exchange (LSE) said that LSE and SSE jointly finished feasible study this year.

For investors from home and abroad, the opening of more channels means more and more choices and asset allocation ways. It is no exaggeration to say that domestic-Hong Kong stock connect is one of ingenious and important contributions made by China to development of international capital market.

Secondly, it helps full convertibility of RMB capital account get through the “last kilometer”.

When introducing current situation of RMB capital account convertibility in June, Lu Lei, head of Research Bureau of the People’s Bank of China, said that there are 7 categories and 40 items for capital account convertibility according to International Monetary Fund. Based on the latest evaluation, RMB capital account has realized 10 items for full convertibility, 27 items for partial convertibility and only 3 items for non-convertibility. So China has basically realized capital account convertibility with only few items not allowed for convertibility.

In order to further push forward RMB capital account convertibility, relevant departments will introduce a series of reform measures in the future and the priority task is to further promote two-way orderly liberation of capital market. Other work is to continue to enlarge types of overseas institutional investors, introduce more investors, further expand QFII quota and cancel qualification and quota review when conditions are matured, enlarge relevant investment convenience to all legal institutions at home and abroad, research and launch QDII2, and further improve convenience for domestic residents to invest in overseas financial market or for foreign investors to invest in China’s financial market.

The key to break through the last kilometer of full convertibility of RMB capital account depends on reform, innovation and liberation. Domestic-Hong Kong stock connect becomes pioneer of advancing this reform.

Thirdly, it helps accelerate upgrade in RMB internationalization.

Giving approval on introduction of Shenzhen-Hong Kong Stock Connect implies that China’s capital market has made a step forward legalization, marketization and internationalization. As Hong Kong is the world’s largest offshore RMB center, Shenzhen-Hong Kong Stock Connect will boost internationalization process of RMB and improve its international status.

With introduction of Shanghai-Hong Kong Stock Connect, RMB’s inclusion in SDR and Shenzhen-Hong Kong Stock Connect, RMB capital account convertibility and RMB internationalization proceed towards targets step by step.

Domestic-Hong Kong stock connect is a new mileage of development of domestic and Hong Kong securities market, which symbolizes a big step toward RMB internationalization, helps further connection between domestic and Hong Kong securities market and boosts cross-border RMB capital flow in the two markets. Only overseas owners of RMB providing effective investment channels can offer sufficient impetus for RMB internationalization. Boosting RMB internationalization has to perfect two-way flow mechanism of offshore RMB market and onshore RMB market to form virtuous cycle.

At the 31st International Currency Standing Committee held in last April, Zhou Xiaochuan, governor of the central bank, made six important promises in order to make RMB to be an international currency. One of the promises is that China will create convenient conditions for cross-border investors and launch Shenzhen-Hong Kong Stock Connect at proper time.

Domestic-Hong Kong stock connect will further perfect policy system of RMB internationalization, which will help improve international society’s credibility, fitness and dependency on RMB and boost continuous and stable development of RMB internationalization.

Along with Shenzhen-Hong Kong Stock Connect to be about to launch, the trend of growing valuation focus in A-share market will continue. After Dec. 5, domestic-Hong Kong stock connect will bring a new era to connection of domestic and Hong Kong stock markets, which is great matter for domestic and overseas investors.

(APD/XH FINANCE)