The long-term success of the Shanghai-Hong Kong Stock Connect (SHSC), depends on knocking down the remaining barriers to entry, including “features of the program that restrict trading strategies, introduce risk and create operational complexity,” according to a white paper published by market research firm Celent and commissioned by the DTCC.
SHSC is the link between the Shanghai and Hong Kong stock exchanges that facilitates mainland Chinese investors that want to buy the stock of Hong Kong and Chinese companies listed in Hong Kong. SHSC also allows foreigners to buy Chinese A shares listed in Shanghai.
The report says institutional investors “continue to cite issues such as limited support for short selling, using Renminbi (RMB) as the sole settlement currency and the hybrid (T+0/T+1) settlement cycle as obstacles to increased usage of SHSC.” Despite that, the paper says the SHSC is off to a solid start and has a bright future ahead of it if those and other concerns are addressed.
Regulators are currently working to address those concerns and that, if successful, those changes should “unleash substantial further investment in A shares longer term; and ultimately open up this significant market to more trading strategies and investors globally,” according to the report.
“We estimate these ‘workarounds’ will drive international holdings of A shares to $428 billion by 2017. Because they are committed to opening China’s capital account, regulators can be expected to expand quotas to meet investor demand,” says Neil Katkov, senior vice president in Celent’s Global Asian Financial Services Group, in a statement.
“The success of the SHSC, despite the challenges, is inspiring a wave of cross-border exchange initiatives involving China, Asia and beyond. Already, a Shenzhen-Hong Kong Stock Connect is slated to start later this year,” Katkov says. “Observers debate the extent to which this will be followed by links between Shanghai or Shenzhen and Taiwan, Singapore, Tokyo, New York and London. SHSC has also inspired a number of proposals for links between Asian markets outside of China.”
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