Hong Kong could attract as much as US$5.6 billion of global funds into the mainland stock markets per year by expanding its menu of investment to include equity derivatives or structured products, according to a government think tank.
Introducing hedging instruments linked to the 70.3 trillion yuan (US$10.4 trillion) equities listed in Shenzhen and Shanghai is one way to enhance the city’s role as a bridge between global funds and many of mainland China’s market or industry leaders.
The Financial Services Development Council (FSDC) has formed a working group comprising industry experts to engage government officials and market regulators to develop its recommendations and take the Stock Connect scheme a step forward, it said on Wednesday.
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“Warrants and structured products are popular in Hong Kong, [representing] 20 per cent of total market turnover,” said Mark Dickens, board member and former head of listing division of Hong Kong Exchanges and Clearing or HKEX, the city’s bourse operator. “The new proposals will give new products for investors to hedge their risks.”
The only derivatives based on underlying Chinese A shares are stock index futures and options, as well as exchange-traded fund (ETF) options. Thus, “the mainland equity market has room for further development when compared to other leading international equity markets,” the council said.
The recommendations signal more efforts in store to defend Hong Kong’s position as a financial hub by leveraging Asia’s biggest pool of securities for growth. This will give foreign investors access to domestic consumption plays such as liquor distiller Kweichow Moutai and appliances maker Midea.
The HKEX established the Stock Connect schemes with Shanghai Stock Exchange in 2014 and Shenzhen in 2016, allowing foreign investors to invest in A shares through Hong Kong. This so-called northbound flow amounted to about 20 billion yuan a day in 2019, or almost six times the volume in their first year.
The proposals may counter some hurdles tied to mainland stock trading rules, the council said. These include a ban on same-day trading that discourages real-time hedging. Letting international investors buy and sell such derivatives initially could prevent any untoward disruption, before opening the access to mainland retail investors, the FSDC suggested.
The council’s recommendations came a day after HKEX chief executive Charles Li Xiaojia unveiled plans to introduce more products and services on bond and currency-linked products and bolster the city as a yuan trading centre.
HKEX aims to attract global liquidity to Hong Kong by creating a one-stop shop for China and Asian exposures under its 2019-2021 strategic plan, while supporting international portfolio diversification by mainland investors.
More from South China Morning Post:
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