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Hong Kong widens Connect stock links for global funds to tap Star Market, tying city's financial future closer to China's heft

Enoch Yiu and Kathleen Magramo enoch.yiu@scmp.com, kathleen.magramo@scmp.com
·6 min read

Hong Kong will broaden its cross-border investment channels with mainland China's stock exchanges, offering the city as the stepping-off point for international funds to gain access to one of the world's best-performing capital markets.

China-domiciled investors can invest in pre-revenue biotechnology companies on Hong Kong's stock exchange while global funds will be allowed to tap shares on Shanghai's Star Market via the expanded Stock Connect schemes, Hong Kong's Chief Executive Carrie Lam Cheng Yuet-ngor said in her annual policy address. Still, companies with secondary listings such as this newspaper's owner Alibaba Group Holding will remain excluded.

"It is always good to extend the investor base in view of more innovative companies on the Star Market," said Tom Chan Pak-lam, chairman of the Institute of Securities Dealers, an industry body for local brokers. "Biotech is a hot industry in Hong Kong and China, so any addition of these companies to the Stock Connect will encourage more mainland investors to trade in Hong Kong."

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The initiative ties Hong Kong's economic future closer to mainland China's market size and financial muscle, after a tumultuous year that has seen the city paying the political price for its role and place in Chinese politics. It's also a boon for Hong Kong's role as China's international financial centre, as it helps channel capital to an economy with a closed capital account and non-convertible currency.

The debut ceremony of China's sci-tech innovation board known as the Star Market on the Shanghai Stock Exchange on July 22, 2019. Photo: Xinhua alt=The debut ceremony of China's sci-tech innovation board known as the Star Market on the Shanghai Stock Exchange on July 22, 2019. Photo: Xinhua

An estimated 36.9 trillion yuan (US$5.6 trillion) of overseas funds flowed into China's A-shares since the first Shanghai-Hong Kong Connect scheme was launched in November 2014, followed by a similar link between the Shenzhen and Hong Kong bourses in 2016. Daily turnover of the so-called northbound funds - buying of A-shares by global funds via Hong Kong - doubled to 90 billion yuan in the first nine months this year, according to exchange data.

"The government's efforts to support the further expansion of our mutual market access programmes ... will help ensure the continued resiliency, vibrancy and attractiveness of Hong Kong's capital markets," said Laura Cha Shih May-lung, chairwoman of the bourse operator Hong Kong Clearing and Exchanges Limited (HKEX) in a statement after Lam's address.

Hong Kong's stock market pared gains after Lam's address, delivered after she obtained the green light from Chinese regulators following her visit to Beijing earlier this month, with the benchmark Hang Seng Index giving up most of its 450-point advance, while the China Enterprise Index that tracks mainland companies slipped into the red.

Investors who bought Alibaba in anticipation that the world's largest e-commerce company would be included in the Connect schemes were left disappointed. Alibaba raised US$13 billion in Hong Kong in November last year in a secondary listing.

"It is disappointing, as adding Alibaba and other secondary-listed companies would have been an important move to attract more US-listed companies to list in Hong Kong," said Louis Tse Ming-kwong, managing director of Hong Kong-based brokerage Wealthy Securities. "The delay may be due to [new] regulations related to these tech giants. When all is sorted out, Alibaba and others would be able to be added to the cross-border investment scheme."

Chief Executive Carrie Lam Cheng Yuet-ngor announces her policy address at Hong Kong's legislature on 25 November 2020. Photo: Felix Wong alt=Chief Executive Carrie Lam Cheng Yuet-ngor announces her policy address at Hong Kong's legislature on 25 November 2020. Photo: Felix Wong

Still, the move gives international investors an easy path to the otherwise inaccessible Star Market, which has ballooned into a 3.2 trillion-yuan bourse of 197 companies soon after its first anniversary. President Xi Jinping, who ordered the establishment of the growth market in November 2018, wanted more of the nation's technology champions and the most valuable start-ups to raise capital at home, and for domestic investors to tap the financial benefits of their growth.

Biotechnology companies, pharmaceutical research start-ups and drug developers in Hong Kong were winners from the potential influx of Chinese capital. As many as 36 pre-revenue biotech start-ups and companies with weighted voting rights have raised funds in Hong Kong through initial public offerings, adding a combined HK$11 trillion of value to the world's fourth-largest capital market since the bourse operator pushed through a listing reform in April 2018.

"It will open up the vast investors market in China for biotech companies," said Clement Chan, managing director of the accounting firm BDO, adding that the move makes it more attractive for China-based biotech companies to list in Hong Kong, as they now have access to a bigger capital pool.

Lam's financial liberalisation and capital market initiatives did not end there. The HKEX is working on a plan to launch a new settlement platform called Synapse in 2022 to help international investors settle mainland Chinese trades according to the country's settlement requirements. Synapse will standardise and streamline settlement workflows for international investors when they trade mainland shares listed in Shanghai or Shenzhen through the two stock connect schemes linking these markets with Hong Kong.

The Hong Kong exchange is exploring possibilities with the Securities and Futures Commission (SFC) to relax investment restrictions in real estate investment trusts (Reits), such as letting such trusts with property still under construction to list in Hong Kong, according to a government source.

The SFC and its regulatory counterparts in the mainland would set parameters for wealth management products that could be sold across borders, rather than approving products one-by-one, the source added. If the wealth management products meet the goalposts, then they could be sold across the Greater Bay Area once approved.

"We are pleased to note that the government will expedite the implementation of the Wealth management Connect scheme," the Hong Kong Investment Funds Association said after the policy address. The policies and incentives outlined to nurture the growth of Reits and family offices "are very helpful and pivotal to further reinforce Hong Kong's position as an asset management centre," it said in a statement.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.