Capital market 'connect' programs between Hong Kong and the Chinese

mainland have presented a key platform for the stepped-up inflow of

international funds into the SAR and other Greater Bay Area cities. Wang

Yuke reports from Hong Kong.

Since its establishment 25 years ago, the Hong Kong Special Administrative

Region has held high its reputation as a world financial center, bustling with

business and financial pursuits. With the deepened financial connectivity

between the city and the Chinese mainland, there is every reason to believe

the SAR's cachet will continue to dazzle the world.

The multiple "connect" or mutual capital market access programs between

Hong Kong and the mainland started in 2014. They have paid off, catalyzing

fluid access and integration between the financial sectors of the both sides

and drawing international capital into the mainland and Hong Kong for

sustained benefits.

Seen as a milestone in consolidating the SAR's status in the world financial

landscape, the connect initiative is also proof that Hong Kong is playing an

indispensable role as the nation's offshore capital hub.

"Turnover on the Hong Kong stock market has soared more than 30 percent

since the launch of the connect programs, borne out by the Bond Connect,

the inclusion of exchange-traded funds in the Stock Connect, and more

renminbi-designed products," says Linus Yip, chief strategist at First

Shanghai Securities in Hong Kong.

The global economy and financial markets have undergone profound

structural changes since the 2008 global financial crisis, said Li Chen, a

professor at the Chinese University of Hong Kong and a research fellow at

the university's Lau Chor Tak Institute of Global Economics and Finance.

A key part of the shift is that "the importance of China's financial markets

comes into prominence as the country further opens up," says Li. "The

connect programs represent a significant policy and business model

innovation that promotes market infrastructure development and

connectivity. They facilitate the prudent opening-up of mainland markets

with built-in risk management mechanisms while stimulating capital flow

into Hong Kong's markets."

From stocks, bonds and funds to ETFs and derivatives, the connect

programs now cover a range of mainland onshore asset classes, said E

Zhihuan, chief economist at Bank of China (Hong Kong).

The constant expansion of the two-way opening-up of financial markets has

given Hong Kong more opportunities to flex its muscle in channeling

foreign investment into the mainland's capital markets while at the same

time prompting mainland financial institutions to "go global".

As of June, InvestHK - the SAR government agency tasked with

strengthening Hong Kong's position as Asia's leading global business

location and luring foreign direct investment - had helped at least 13 family

offices based on the mainland and in Europe, the Association of Southeast

Asian Nations, and North America to open up or expand their businesses in

Hong Kong. "Overseas family offices have shown great interest in the

mainland, especially in the Guangdong-Hong Kong-Macao Greater Bay

Area," says Dixon Wong, head of financial services and global head of

family office at InvestHK.

"Hong Kong could be a crucial center for family offices to diversify their

strategies to gain exposure to assets on the mainland and in Asia," he says.

"The connect programs have lifted the quality, depth and breadth of

interconnectivity between Hong Kong and the mainland, enabling global

asset managers, family offices and ultra-high-net-worth individuals to use

the SAR as an open platform to invest in various Treasury products on the

mainland, and vice versa," says Wong. These market links have shaped

Hong Kong's unrivaled and irreplaceable position as a hub for family offices

in the Asia-Pacific region.

Effective access

The Stock Connect, initially just between the Hong Kong and Shanghai

stock exchanges, kicked off in November 2014. It was extended to the

Shenzhen bourse in 2016, allowing global funds easy access to the

mainland's stock markets. International investors can buy the mainland's A

shares with less restrictions, while mainland investors can purchase shares

of Hong Kong and mainland companies listed on the Hong Kong bourse.

Yip says the programs have gone down well with international investors.

"Following their launch, global benchmark providers MSCI and FTSE

Russell began including A shares in their indices in 2019," he recalls. This

was made possible by the "effective and lubricant access to engage in the

mainland market", which is supported by the programs that entered the radar

of global investors, he says.

The ETF Connect, which was rolled out in July, further extended cross-

border access to a wider range of securities under the Stock Connect,

allowing international investors to deal in 83 ETFs on the mainland. "The

ETF is a good product as it's a basket of composite stocks constructed to

follow an index or to build under a theme. Hence, it's more risk-controllable

and diversified by itself," says Yip.

The Bond Connect, with its northbound trading launched in 2017, has

become the primary channel for international asset managers to tap into the

mainland's interbank bond market. It reinforces Hong Kong's role as a world

platform for bonds trading, which subsequently increases the funding flow.

"When the flow of funds goes up, the demand for all aspects of professional

services, like legal, trading, sales, settlement, custodian, compliance and

rating services would increase accordingly," explains Yip.

The Cross-boundary Wealth Management Connect Scheme in the

Guangdong-Hong Kong-Macao Greater Bay Area came into being in

September 2021. It allows eligible mainland, Hong Kong and Macao

residents in the Greater Bay Area to invest in wealth management products

distributed by banks in each other's markets through a closed-loop funds

flow channel established among their respective banking systems.

"There is a huge demand for wealth management in the Greater Bay Area,"

says Jasper Yip, partner of Oliver Wyman. A survey conducted by the firm

in the Greater Bay Area shows that a large portion of investors prefer

foreign products, with about 66 percent of them choosing them over local

products when risks and returns are similar, he says. "The scheme has

demonstrated the capability to move to a broader variety of products and

cater to wider investment choices," he says.

The market access programs have come a long way in strengthening

financial complementarity among mainland cities in the Greater Bay Area

and Hong Kong, acknowledges Jasper Yip. The myriad of opportunities

created by the connect programs will inspire Hong Kong banks to consider

leveraging markets in the region to develop their next generation of talent,

infrastructure and ecosystem partnership, he says.

There is also the upcoming Swap Connect - a program between Hong Kong

and mainland interbank interest rate swap markets. It has been hailed by

investors at home and abroad who are keen to trade in cross-border

interbank derivatives markets.

E Zhihuan from the Bank of China calls it a welcome start that "provides a

direction for the further opening-up of domestic financial markets and

relaxation of restrictions on foreign institutional investors' participation in

onshore financial derivatives markets".

With RMB internationalization set to scale new heights, she expects Hong

Kong to maximize its influential capacities to improve market operations,

activate market demand for the Chinese currency, increase global RMB cash

flow, and help overseas investors secure a stake in RMB assets.