HKEX Chief Executive Charles Li responded to media questions after a listing ceremony in Hong Kong this morning regarding the announcement by the Shanghai and Shenzhen stock exchanges last Saturday that excludes companies that use weighted voting rights from Stock Connect’s Southbound trading.
Below is a transcript of his comments at the media standup. Some parts are translated from the original in Chinese.
Q: What is HKEX’s view on Mainland exchanges’ announcement regarding which stocks are eligible for inclusion in Southbound trading under Stock Connect?
Charles Li: I’d like to share three main points with you.
First, Stock Connect is a groundbreaking programme that brings benefits to the Mainland and Hong Kong markets, while the listing of new economy companies provides investors with even more choice. These two things together amount to double happiness. The Mainland is working on China Depository Receipts (CDRs) to welcome new economy companies, and we are welcoming them by giving them the option of listing with WVR. The reforms on both sides are good for the overall market, and would be even better if they were both part of Stock Connect.
Second, markets grow and prosper when they offer choice. Investors need choice, and issuers need choice, either through CDRs or a listing in Hong Kong. Hong Kong is an open market, meaning companies can list here whenever they want, and their pricing and valuation are decided by the market. We offer choice to issuers, but we must provide more choice to investors: either for international investors who want to participate in CDRs, for Mainland investors who want to participate in the new economy with WVR companies listed in Hong Kong, or even for the same companies listed in the two markets but with different prices. Investors should have the freedom and choice to invest as they wish, which is a core belief of our market. As the Hong Kong and Mainland markets operate differently and the timing of IPOs is different, both sides should work towards providing as much choice as possible to both issuers and investors.
Third, the core concept of Stock Connect is the reciprocal opening of both markets with Mainland investors accessing the Hong Kong market through Southbound trading and international investors accessing the A-share market via Northbound trading. While Mainland investors have shown an appetite for Hong Kong stocks, international investors have also been tapping the A-share market on a large scale. In fact, net inflow to the Mainland through Northbound trading topped RMB100 billion during the volatile period in May and June. The scale of Northbound investments has been strong for some time, which underscores the importance of providing as many opportunities to investors as possible.
Q: Will the future development of Stock Connect be impacted by this latest development?
Li: There are two dimensions to consider when we look at this question. In our view, the reciprocal opening is not going to change – there is no turning back. That which is good for China broadly, good for Hong Kong, and good for the market is going to prevail.
There may be small disagreements in the short term, but it does not fundamentally change the forward trajectory of Stock Connect or the operation of the Hong Kong market. We are very confident that Hong Kong, as an internationally-respected financial centre and critical connector between China and the international markets, will continue to play a vital role. Our position will only become more important over time, not less.
We admit there are some differences, which happen anytime commercial institutions decide to work together. This is no different between exchanges. But we broadly agree on the overall direction and significance of Stock Connect, which is mutual access to both markets on the greatest possible scale. The recent differences between the two announcements by the Mainland exchanges and HKEX are not about whether to include WVR companies in Stock Connect, but when to include them. It gives us a chance to catch our breath, take a pause, and study how exactly it should work. We strongly believe the China Securities Regulatory Commission (CSRC) will look closely at the development of the A-share and Hong Kong markets with broad vision, and this will be sorted out in time.
I’m going to Beijing today to attend a meeting organised by the CSRC, and this will be one of the discussion topics. We hope to reach a consensus on a timetable, process and plan for how we will move forward in the interests of both markets. We’ll handle this issue well.
Q: Why wasn’t this announced before the listing of the first WVR company in Hong Kong? Many investors have already participated in trading since the first WVR company listed a week ago. Are eligible securities for Stock Connect’s Southbound trading determined by Mainland exchanges?
Li: Our views have been very consistent: WVR companies should be included in the list of eligible securities for Southbound trading under Stock Connect. We have held discussions with the domestic exchanges over the past several months and expressed our opinion. The domestic exchanges have different views, so we suggested making an announcement before the listing of the first WVR company to manage market expectations and ensure investors were well prepared. However, we received no notice from Mainland exchanges before the listing of the first WVR company last week.
According to Stock Connect arrangements, the list of eligible Southbound stocks is determined and announced by Mainland exchanges, while HKEX is responsible for the list of eligible Northbound stocks. We’ve been following this practice over the past four years. When Mainland exchanges didn’t make an announcement before the listing of the first WVR company, we believed they had not made a final decision. The Mainland exchanges made their announcement last Saturday, and we subsequently issued our response.
Q: Mainland exchanges said Mainland investors are not familiar with WVR so should not be included at this time. With biotech companies also likely to list soon, will Mainland exchanges also exclude those companies from Southbound trading?
This will be sorted out in time. Shanghai Connect and Shenzhen Connect are still relatively new, so Mainland investors have not been investing in Hong Kong for very long. Now we have large scale investments happening in both directions. The trend of opening will continue and Stock Connect will develop further. This direction is irreversible, but we need to be patient.
Q: Are you going to raise this with the CSRC during your trip to Beijing?
Yes, I will be attending many coordination meetings and will be addressing this issue. Actually, we’ve been discussing this issue for some time now. We are hoping that continued communication will lead to a consensus that includes a timetable, process and how Stock Connect will evolve over time.
Q: Will the latest development impact the listing of more Mainland WVR companies in Hong Kong?
Companies have been coming to Hong Kong to list for decades, long before Stock Connect existed. They choose us for a number of reasons and we offer robust fundraising solutions. It would be even better if these companies could be included in Stock Connect so Mainland investors can also share the growth opportunities.
If CDRs in the Mainland enable all new economy companies to list in the A-share market, we will definitely allow investors to invest.
Q: Does the reasoning for not including WVR companies in Southbound trading make sense to you given that CDRs could be issued on companies using WVR?
I think the domestic market has done a fantastic and very extensive job of evaluating the prospects of WVR companies. They actually have pretty much everything set, even including the raising of special funds, and mutual funds, to actually invest in WVR companies. So I am very confident they know exactly how WVR companies work, and how that can be managed.
I think it’s only a matter of time before everybody gets very comfortable. This is just a timing issue about when we will include, not whether.