[HONG KONG] A landmark scheme connecting Shanghai and Hong Kong stock markets is finally starting to attract more global institutional investors, as a lag in trading and settlements that posed a risk to investors has been ironed out.
More institutional activity on the platform will likely speed up reforms and the rollout of another scheme linking the southern city of Shenzhen and Hong Kong, market participants say.
"I dismiss the thought that it is only a retail product," Kevin Rideout, head of business development at the Hong Kong Stock Exchange, said at the FIX conference on Thursday. "What I can see is that the recent top 10 overall stock connect volumes are made up from the international firms and that probably tells me that it's largely institutional."
Launched in November 2014, the Shanghai-Hong Kong Stock Connect had promised to open up China's capital markets to foreign investors, heralding bolder stock market reforms with the ultimate goal of full capital account convertibility. Instead, it was criticised for being used by retail investors and hedge funds to dabble in mainland markets.
Quotas inbound and outbound have not been fully used up, aggravated by a mid-year stock market crash in 2015 and volatility in the renminbi that spooked investors.
The failure of the scheme to draw institutions, such as insurance companies and funds, forced Beijing to postpone the launch of the Shenzhen project and also from expanding the scope of the existing programme.
Recent reforms, however, particularly in stock delivery and settlement services, have removed some uncertainty for investors.
Connect brokers were hopeful of more institutional participation since last year but problems around settlement issues were only resolved in April.
China follows a unique T+0 settlement model - shares are exchanged on the day they are traded but funds are transferred the following day. In most markets, including Hong Kong, a T+2 model is followed. A lag in settlement gives rise to broker counterparty risks.
This last setback was ironed out in April when a "delivery versus payment (DVP)" model was introduced.
"We are seeing more institutional flows on our platform going into the northbound leg with more participation from the European funds," said the head of electronic trading at a US bank in Hong Kong.
While overall aggregate quota utilisation on the Shanghai leg of the scheme remains low at 42 per cent, below a peak of 57 per cent last June, there are signs of a pick-up.
Greater institutional participation bodes well for China's stock markets at a time when turnover on the Shanghai bourse is near its lowest point this year.
The share of the top-ranked broker category, which services institutional clients, has grown recently and accounts for nearly 70 per cent of turnover on the China-bound leg, Hong Kong stock exchange data shows.
"We are definitely seeing more institutional clients on our platforms focused on stock connect and the cheap valuations are an additional attraction," said Andrew Sullivan, managing director of sales trading at Haitong International Securities in Hong Kong.