Three months after China opened its much-anticipated trading link between Shanghai and Hong Kong, designed to allow for increased foreign investment in Chinese stocks, foreign investors have largely stayed away.
Stock Connect, which allows foreign investors to trade Chinese stocks through Hong Kong-registered brokers up to pre-set limits, has failed to meet the expectations of both investors and regulators, according to the Financial Times.
Trading volume since Stock Connect was established on November 19, 2014 has hovered at around a fifth of the daily limit of 23.5 bn yuan ($3.8 bn) in cross-border share purchases, confounding early expectations that the limit would easily be met and regulators would find themselves pressured to allow even higher levels of trading.
Many investors in mainland China say they are waiting for Stock Connect to mature while they continue to use more established channels of investment into the country, such as the qualified foreign institutional investor (QFII) and renminbi qualified foreign institutional investor (RQFII) schemes, the newspaper reports.
‘It’s still early days for Stock Connect and we are waiting for any glitches to be resolved,’ says Nicholas Yeo, head of Chinese equities at Aberdeen Asset Management, in an interview with the FT. ‘In any case, we are able to access the local market using our QF quotas.’
Glitches to be worked out in Stock Connect, according to the newspaper, include a series of regulations dictating that only companies on certain indexes are eligible for foreign investment and prohibiting foreigners from investing in IPOs. One technical issue prompts a time lag between the Hong Kong and Shanghai stock exchange systems on public holidays, meaning trades can be implemented with a delay.
Meanwhile, authorities are planning to extend the program to the Shenzhen Stock Exchange, with its higher concentration of technology and manufacturing stocks that many foreign investors seek. Yeo predicts the kinks in Stock Connect will be worked out in time for the expansion, generating an increase in interest from foreign investors.
