01 December 2022
Hong Kong and China began working with the "Stock Connect" system only a decade ago. This facilitated global investment with local clearing services so international investors could transact under international regulations. While this has been a welcome addition for those looking at global investment strategies, many people are unaware of the full depth of the “Connect” system.
Stock Connect is the most prominent service which currently exists between China and Hong Kong. The service allows Chinese companies to have secondary listings on the Hong Kong stock market with these shares bought and sold by international investors. While not directly investing via the Chinese stock exchanges, global investors are directly acquiring stakes in Chinese companies. This service was first introduced in 2014 and has been extended numerous times to involve more companies and improve liquidity.
For many years, it has been difficult for international investors to acquire Chinese bonds. However, the introduction of the Bond Connect system in 2017 brought about genuine global investment opportunities. It allowed international investors to add another element to their global investment aspirations by buying Chinese bonds through Hong Kong. It also opened new income channels for Chinese companies/bodies looking to raise funds. While transactions are carried out in Hong Kong, this is via direct access to the China Interbank Bond Market.
In October 2021, the Wealth Management Connect system was launched, which allows individuals in the Greater Bay Area (GBA) to require certain products sold by Hong Kong and Macao banks. Conversely, this will also enable Hong Kong and Macao investors to acquire products sold by banks in the GBA. This has greatly assisted Chinese mainland residents looking at a global investment strategy to diversify their investment portfolios. This Connect system is also expected to enhance and encourage innovation across various investment products.
Exchange Traded Funds (ETFs) are integral to many global investment strategies for individuals and collective funds. These funds tend to focus on specific investment sectors/groups and are readily tradable in a similar fashion to stocks and shares. Launched in 2022, there are high expectations for the EFT Connect system, which is forecast to reach an annual turnover of around $29.7 billion within two years. As with other Connect systems, the specific details of the clearing services make it work. This ensures that international investors can invest under international regulations.
The Swap Connect system will go live in the next six months, allowing international investors to include Chinese mainland interest rate swaps in their global investment strategies. This is a vast market, and there is growing interest in Chinese bonds and interest rate swaps from around the world. We await more details in due course, but this is yet another step in the right direction.
The key to all of the Connect systems is the ability to maintain clearing services on the Hong Kong and Chinese mainland sides, which abide by local and international regulations. As the number of investment services continues to grow, there are high hopes that this is just the tip of the iceberg concerning joint financial ventures between mainland China and Hong Kong.Back to News