China’s financial market reform opens up opportunities for Hong Kong, strengthens gateway role

Xie Yu

China’s ongoing financial liberalisation will continue to benefit Hong Kong as its status as a gateway to the mainland will be hard to replace, say analysts.

The demand for access to China’s equities and fixed-income markets is rapidly increasing among foreign investors, and they now understand both the opportunities and risks brought by a wider opening up of the market, said Damien Horth, head of Asia-Pacific research at UBS.

China announced on September 10 that it would remove the quota limits on two cross-border investment schemes – Qualified Foreign Financial Institutional Investor and Renminbi Qualified Foreign Financial Institutional Investor – marking the latest step in its reforms.

“Hong Kong is well placed [to benefit from the liberalisation in China], given the experience, given the regulatory framework,” he said, noting that foreigner firms feel comfortable using Hong Kong as a gateway to trade China’s onshore market.

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Horth’s views echo those of the city’s leaders and regulators who see rising interest among foreign investors to tap the mainland’s markets, but are comfortable parking their money in Hong Kong.

The city’s bourse, the Hong Kong Exchanges and Clearing, has been adding more “connect” schemes to widen access for foreigners to trade China’s onshore market, allowing capital flow into and out of the Shanghai and Shenzhen exchanges via Hong Kong.

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Some new “connect” products that have been launch include exchange-traded funds and metals and currencies contracts.

The existing stock and bond connect schemes have already seen rising capital inflow from international institutional investors. Horth noted interest from clients was particularly strong for health care, technology and consumer stocks.

But to tap that mainland market, people tend to start from Hong Kong, Horth said. “We are building our team in China, but also our team in Hong Kong ... In terms of talent, Hong Kong is a unique place where people know about China, and also the rest of the world.”

Pei Minxin, professor of government at Claremont McKenna College in California, said that Hong Kong is a unique place because of its proximity to the Chinese mainland, while at the same it was comfortable enough for foreigners to do business there.

“Foreigners have been doing business for more than a century in Hong Kong. They know Hong Kong well,” said the author of China’s Crony Capitalism, adding that the common law system, and a freely convertible currency pegged to the US dollar are crucial pillars that make the city irreplaceable.

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