Hong Kong has got a great opportunity as China’s offshore financial center with new products and a deeper yuan pool in the expanded connectivity scheme
Hong Kong expanded its cross-border investment channel with Shanghai and Shenzhen with two new categories of financial products on Monday, raising the city’s status as the center of China’s overseas capital.
ETF Connect has been officially launched, allowing global investors to tap into 83 exchange-traded funds (ETFs) in China – 53 in Shanghai, 30 in Shenzhen – via accounts held in Hong Kong, an opening that could attract up to 200 billion yuan ( United States ($29.8 billion) of investment within one to two years, according to forecasts by China Asset Management.
Separately, monetary authorities in China and Hong Kong said they would set up Swap Connect for global investors to hedge the risk of 3.7 trillion yuan of offshore bonds they hold. The swap process will begin at the end of 2022 at the earliest, with interest rate swaps for users to replace one stream of future interest payments with another, according to a joint statement from financial and monetary regulators in China and Hong Kong.
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The expansion of the connectivity scheme, which came on the heels of the 25th anniversary of Hong Kong’s return to Chinese sovereignty three days ago, is one of the clearest signs of the city’s indispensable role as China’s offshore financial center. Hong Kong is the crucial starting point for Chinese companies and investors to tap offshore funds, and provides a gateway for global capital to access China, the world’s second largest economy and capital market.
Jun Lee Ka-chiu speaks during the swearing-in ceremony as Chief Executive of Hong Kong on July 1, 2022. Photo: Bloomberg alt = John Lee Ka-chiu speaks during the swearing-in ceremony as Chief Executive of Hong Kong on July 1, 2022 Photo: Bloomberg >
“The world is undergoing seismic changes unprecedented in a century, but times are on our side, and this is the basis for our perseverance, determination and confidence,” Hong Kong Chief Executive Jun Lee Ka-chiu said during a webinar to celebrate. Bond Connect 5th Anniversary. In progress [Hong Kong’s development] In an international financial center, we [witnessed] The fact that China’s steady development is the strongest support [for] Hong Kong “.
Connect started in 2014 as the brain child of former Hong Kong stock exchange chief Charles Li Xiaojia, giving global funds access to the yuan-denominated stock market in mainland China. It also allowed Chinese institutions and professional investors the ability to invest in stocks listed on the Hong Kong Stock Exchange.
Julia Leung Fung Yi, Executive Vice President of the Hong Kong Securities and Futures Commission (SFC) at the SFC office in Quarry Bay on September 21, 2021. Photo: Jonathan Wong alt = Julia Leung Fung Yee, Executive Vice President of Hong Kong Securities and Futures Commission In Kong (SFC) at the SFC office in Quarry Bay on September 21, 2021. Photo: Jonathan Wong >
Over the years, Connect has grown in size, geography and diversity, expanding to Bond Connect in 2017, Shanghai-London Stock Connect in 2019, wealth management products last year, and now ETFs and swaps.
“Hong Kong is a convenient place, [where] Investors can invest knowing they are complying with China’s regulations, “without actually being on the mainland,” Julia Leung Fung Yi, executive vice president of the Securities and Futures Commission (SFC) said during an online forum to celebrate the anniversary. From Bond Connect.
Stock markets were mixed after the various Connect programs were announced. Hong Kong’s benchmark Hang Seng Index closed the day 0.1 percent lower, after working its way out of a 1.8 percent decline. The main Shanghai index rose 0.5 per cent while the main Shenzhen index rose 1.2 per cent.
An ETF is a basket of underlying securities, including stocks, commodities, and other asset classes, that investors can buy and sell on an exchange like a common stock.
Xu Meng, executive director of quantitative investment at China Asset Management, which includes 10 ETFs included in the first 83 eligible overseas investment funds.
“This will benefit international asset managers because they usually use ETFs as a tool to improve the liquidity of the funds,” Xu said, adding that offshore investors tend to include ETFs in their portfolios, as they have better liquidity and more diversified risks compared to investing in a single stock.
A total of 694 ETFs worth 1.5 trillion yuan in Shanghai and Shenzhen, with offerings growing 30 percent last year, according to data from Shenwan Hongyuan Group and Huachuang Securities. This compares to the total market value of 84 trillion yuan for the internal Chinese market.
The Hong Kong ETF market is much smaller, hosting just 150 funds worth HK$405.9 billion (US$51.7 billion) in assets under management, according to data provided by Huaxin Securities.
Swap Connect is a vital enhancement to help investors hedge against risk in the bond market. Pan Gongsheng, deputy governor of the People’s Bank of China (PBOC), said during a Bond Connect seminar that global investors have increased their holdings of Chinese yuan-denominated bonds by 40 percent each year since 2017 to 3.7 trillion yuan.
“In today’s volatile market and tense geopolitical situation, people are looking forward to China’s very stable economic policy aimed at creating a very stable environment,” said Jimmy Jim, Head of Global Markets at ICBC (Asia) Ltd. “This is very important for the investor – he can better predict what is happening and reduce market risk”
It will start through so-called northbound trading, allowing global investors to access China’s derivatives market through a connection between the clearinghouses in both China and Hong Kong.
The timetable for the southern route, which will enable mainland investors to gain access to Hong Kong’s derivatives market, was not immediately clear.
Hong Kong has also received a boost in its role as the world’s largest offshore trading center for the renminbi. China’s central bank upgraded its currency swap facility with Hong Kong to a permanent agreement, and expanded the volume by 60 percent to 800 billion yuan.
The move, the first permanent swap agreement for the People’s Bank of China, is aimed at providing long-term liquidity support to the Hong Kong market, helping to stabilize market expectations and promoting the city’s development of the offshore yuan market, the central bank said.
Lu Weiming, president of Orient Securities Co., Ltd., said renminbi-denominated investment is “attractive for many reasons,” and the volume of China-related investments will continue to “grow… in the medium to long term” despite the COVID-19 pandemic. .
China has maintained its policy focus on national development, [so] Lu said the renminbi’s exchange rate has remained stable compared to other emerging market currencies. And the renminbi can better meet the needs of investors for asset management.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative audio report on China and Asia in over a century. For more SCMP stories, please explore the SCMP app or visit Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. all rights are save.
Copyright (c) 2022. South China Morning Post Publishers Ltd. all rights are save.