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The success of Shanghai-Hong Kong Stock Connect (SHSC) is kick-starting a wave of cross-border exchange initiatives involving China, Asia and beyond, according to the new whitepaper, “Shanghai-Hong Kong Stock Connect: It’s Just the Beginning,” commissioned by The Depository Trust & Clearing Corporation (DTCC) and published by Celent, a division of Oliver Wyman.

China has emerged as one of the world’s leading economies following decades of growth that has hovered around 10% annually. Launched in November 2014, SHSC is a path-breaking initiative that provides international investors with another channel of direct access to China’s domestic A shares market outside of the existing route of getting a foreign investor license through the Qualified Foreign Institutional Investor (QFII) and Renminbi QFII (RQFII) programs. SHSC is a trading link between the Hong Kong and Shanghai stock exchanges that enables institutional and retail foreign investors to trade on the Shanghai bourse, and investors in China to trade Hong Kong-listed issues.

The white paper focuses on northbound trading and the implications for institutional investors. Northbound trading allows investors outside mainland China to trade selected equities on the Shanghai Stock Exchange, routed through Hong Kong brokers. Already a Shenzhen-Hong Kong Stock Connect is slated to start by 2015. Chinese and Asian cross-border links for derivatives, fixed income and commodities are also being discussed.

Over the next few years, as other cross-border trading increases within the region as a result of Stock Connect and other similar programs, market participants will need to ensure that their post-trade systems and operations can scale to meet increased volumes and that best practice is employed to minimize operational risk.

According to Celent, the key factor driving demand for use of SHSC is that it opens up untapped markets and those markets previously difficult to access. Celent anticipates that continued improvements and enhancements to Stock Connect’s idiosyncratic features will:

  • Enable greater participation by institutional investors and Hedge Funds;
  • Pave the way to including A shares in global equity benchmark indices such as MSCI within the next few years; and
  • Ultimately open up the market to advanced trading strategies, including high frequency trading.

Celent estimates that these factors will drive international holdings of A shares to USD 428 billion by 2017. Committed to opening China’s capital account, regulators can be expected to expand the trading quotas allowed for the SHSC to meet investors demand.

Download White Paper: Shanghai-Hong Kong Stock Connect: It’s Just the Beginning

News release: Success of Shanghai-Hong Kong Stock Connect Hinges on Removing Barriers to Participation - According to Study