China’s financial services industry is undergoing rapid transformation. The country is set to continue to liberalise its markets and advance with its financial reform programmes amid a Covid-reshaped world, creating opportunities for domestic and global investors as well as for local and global financial institutions.
As China’s capital markets continue to evolve, it has become increasingly accessible to global investors through pioneering channels, such as Stock Connect, to enable global investors to access China’s equities and other markets.
Related: Improving Global Investors Access to Stock Connect
Pioneering Mutual Market Access
Stock Connect is a landmark initiative by Hong Kong Exchanges and Clearing Limited (HKEX) and its mainland counterparts to provide two-way, cross-border trading between equity markets in Mainland China and Hong Kong. The programme was launched in 2014 to allow trading of eligible stocks between stock exchanges in Shanghai and Hong Kong, followed by the addition of the Shenzhen-Hong Kong connect programme in 2016. The Northbound Stock Connect enables global investors to have direct access to Mainland China’s equities markets via the Stock Exchange of Hong Kong.
For domestic investors from Mainland China, they could use the Southbound Stock Connect channel to invest in eligible securities listed on the Stock Exchange of Hong Kong.
Opening up to foreign participation
While there are different channels available for global investors to trade in onshore-listed Chinese equities quoted in renminbi (RMB), also known as A-shares, Stock Connect by far is the most widely used channel as the programme offers immediate liquidity and greater flexibility. Stock Connect has been hitting record turnover in recent years. The Northbound average daily turnover increased by 54% year-on-year to RMB114 billion (approximately USD17.6 billion) in the first half of 2021, reflecting the growing investors’ interest in accessing China’s growth story via the Stock Connect programme. With China’s A-Shares included in major investment indexes (such as MSCI and FTSE Russel), foreign investors’ participation in the Chinese capital markets is expected to continue to grow, so does the Stock Connect scheme.
HKEX Synapse’s integration with DTCC’s ITP services is our first large-scale implementation of no-touch post-trade processing that connects to a depository outside of the United States.
Overcoming Challenges with Shortened Settlement Cycle
Stock Connect poses a unique operational challenge due to differences in settlement cycles between Mainland China and Hong Kong. As trades are settled on a T+0 settlement cycle in Mainland China versus a T+2 cycle in Hong Kong and other key international markets, global investors only have about four hours to settle Northbound trades while ensuring compliance with the rules of Stock Connect. HKEX and the market participants have been deploying tailored solutions to adapt, but these workarounds have introduced additional operating, processing and counterparty risks.
Leveraging the Power of No-Touch Workflow
To manage the unique characteristics of Northbound Stock Connect, HKEX is launching HKEX Synapse, a streamlined, integrated and real-time settlement notification platform, to complement the existing post-trade infrastructure for the programme.
Using DAML smart contract technology, HKEX Synapse helps to standardise and streamline the post-trade process for Northbound Stock Connect, providing asset managers, brokers, global custodians, local custodians, and clearing participants instantaneous and transparent visibility to their settlement instructions to ensure faster and more efficient trade settlement.
In order to address time zone and settlement cycle differences, the HKEX Synapse platform is integrated with DTCC’s Institutional Trade Processing (ITP) services to enable global investors and market participants to efficiently streamline cross border post-trade workflows by automating the trade confirmation and settlement notification and exception handling processes through a real-time link with HKEX Synapse.
This will be DTCC’s first large-scale implementation of no-touch post-trade processing that connects to a depository – outside of the United States. DTCC’s no-touch processing is an open, integrated and resilient post-trade infrastructure that eliminates redundancies and manual interventions by delivering a suite of integrated services. These automated services enable full trade lifecycle management, providing transparency and oversight from pre-trade/account enablement through settlement finality.