The Hong Kong securities market has been very active since the Easter Holidays ended, with the Hang Seng Index rising sharply for consecutive days. We've set a number of new records on back-to-back trading days, including market capitalisation, securities turnover, Stock Connect turnover, and many more. But amid all this excitement, both Mainland and Hong Kong investors have been asking me some key questions. Southbound investors are wondering if now is a good time to get into the market and how they can join if the quota is filled. Meanwhile, Hong Kong investors have asked if our local market will become more volatile once quota restrictions are relaxed.
I don't have a crystal ball to tell me which direction the market will move; your guess is as good as mine. But as one of the builders of the Stock Connect bridge, I want to say we should all take a deep breath after these record setting days and remember we’re on a long road.
Take a deep breath
Stock Connect is a bridge that was built to stay open, so there's no need for Mainland or international investors to rush to cross. Everyone knows that if you travel over the Christmas holidays, you'll see plenty of crowds and potentially delays at the airport. Likewise, the Stock Connect bridge is crowded with traffic now, so investors can be prudent about when they feel is the right time to cross.
We made an enormous investment in this bridge, and we are continuing to work with brokers, information vendors, and technology vendors to beef up our investment to provide a reliable trading environment for investors.
The scheme will evolve over time
When Stock Connect launched, we introduced aggregate and daily quotas to ensure the scheme got off the ground in a smooth and stable way. Over the past two days, the Southbound quota has been fully used up before the market closed. This has prevented some Mainland investors from getting into the market when they wanted to, and they are urging authorities to quickly expand the quotas.
I would like to remind our friends in the Mainland: don’t be too anxious. You should be patient. Regulators are closely and cautiously monitoring market developments and will consider expanding the quotas at the appropriate time. I am confident about this for two reasons: first, despite the active market, the aggregate amount going through Stock Connect is very small. The aggregate Southbound net flow of funds, as defined by the quota, has only amounted to RMB47.9 billion*, which represents just 19 per cent of the total. RMB115.7 billion has been used of the Northbound quota, or 39 per cent. To put this in perspective, the A share market has been recording turnover of over RMB 1 trillion since late last year, regularly setting new records. The fund flows under Stock Connect are thus a tiny trickle compared with turnover in the A share market.
Second, Stock Connect has been designed as a closed-loop, transparent, and manageable scheme in which all transactions are clearly recorded and reflected in the exchange and clearing systems of both markets. There have not been any disorderly fund flows and after sell orders are executed, capital is routed back to the investor’s home market. The design of this system allows enormous amounts of trading to take place without substantial fund flows actually having to cross the border every day, and also ensures that regulators in both markets can sufficiently monitor and manage the risk of cross-border transactions.
Endless opportunities, but not without risk
With the start of mutual market access, international investors who emphasise value investing are having their first historic encounter with Mainland investors, who are primarily individuals. This will have a profound impact on both the Mainland and Hong Kong securities markets. These two groups of investors are totally different, and there will be certain chemical reactions as they meet, leading the development of China’s capital market into a new era.
Out of this new era will come many new opportunities for local Hong Kong investors, but they won't come without risk. Stock Connect is the first time many Mainland investors are able to invest overseas, while their participation in Hong Kong will bring enormous opportunities and inject new vitality into our local securities market. At the same time, their differences in investment values, risk awareness and regulatory cultures will bring new challenges and risks to Hong Kong investors, particularly retail ones. Staying calm and exercising caution in a more active market will be a challenge to each investor in Hong Kong.
As the market operator and regulator, we know that the ever-increasing trading volume means that we are shouldering more and larger responsibilities. We must continue to ensure the reliability of our trading systems, constantly monitor the market and take appropriate risk management measures when necessary to ensure the market operates in a smooth and orderly way.
In closing, Stock Connect is more than just another simple investment channel. Its real, lasting meaning will be in enabling Chinese investors to internationalise their asset allocation in order to grow their wealth over the long term. Stock Connect is here to stay.
*Aggregate quota consumption up to 8 April 2015