As HK-Shanghai Connect scheme stutters, doubts grow on exchange links

HONG KONG (Reuters) - A tepid response from investors to the Hong Kong-Shanghai Stock Connect scheme in its first year has made industry executives skeptical about the success of proposed exchange link-ups and their value in providing equity market access.

Hong Kong Exchanges and Clearing Ltd Chief Executive Charles Li poses at his office during an interview by Reuters in Hong Kong, China November 17, 2015. REUTERS/Bobby Yip

The scheme, which celebrated its one-year anniversary this week, has been hailed as a landmark development and sparked “connect” mania, with several bourses, including Singapore, Taiwan, Japan and London, all looking to build their own versions.

But a lower than expected participation in the scheme underscores the difficulties in making a commercial success of such link-ups, with diverse investor needs, post-trade processes, and time-zone differences remaining significant obstacles.

The Stock Connect scheme allows, for the first time, foreign investors to trade mainland-listed Chinese stocks via the Hong Kong bourse and Chinese investors to trade Hong Kong-listed stocks on the Shanghai exchange. But a year on, only 40 percent of the quota for buying mainland stocks has been used while the Hong Kong leg has only seen a 36 percent utilization rate.

Charles Li, chief executive of the Hong Kong Exchanges and Clearing Ltd 0388.HK, told the Reuters Global Investment Outlook Summit that making Stock Connect wholly successful will take time and depend on ensuring the HKEx meets Chinese investors' needs.

“The biggest pool of capital today is in China’s banking system. Over the next 20 years, a huge portion of that will have to be globally deployed,” he said, adding that the trading link will attempt to capture a bigger chunk of this money by expanding its product offerings for Chinese investors. “All we need to do is bring international products to Hong Kong,” Li said.

While in Europe, close economic integration has seen pan-European exchanges flourish, in Asia long-entrenched protectionism of domestic bourses means share trading continues to be fragmented along national lines.

In theory, equity trading links make it easier for investors to traverse these borders, but in practice these arrangements have often faltered.

    Singapore Exchange's SGXL.SI Chi-East platform, a pan-Asian trading pool launched in 2010, lasted around 18 months before it was forced to close due to low volumes. And a regional exchange link between the bourses of the Association of Southeast Asian Nations (ASEAN), which has been more than six years in the making, is still struggling to gain traction.

Mutual market access is often half the battle. The link-ups have to meet investor needs, and mimic the way fund managers think about and allocate into stocks, said industry experts.

“All the markets are fairly different, so although an ASEAN link is a good concept, the challenge is around investor allocation,” said Jessie Pak, managing director for Asia at index provider FTSE Russell, owned by the London Stock Exchange Group. “Do investors see ASEAN as one asset class, or one country?”

Post-trade processes can often be a major stumbling block. In the case of Stock Connect, settlement and custody rather than trading, have proved the biggest obstacles for investors. Likewise, Chi-East’s post-trade arrangement was too complicated, according to brokers.

“You are only more effective if you have trading and settlement in one linkage,” said Loh Boon Chye, the recently-appointed chief executive of the Singapore Exchange.

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Additional reporting by Lisa Jucca and Anshuman Daga in SINGAPORE; Editing by Muralikumar Anantharaman