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Jian Shi Cortesi, GAM

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Shanghai-Hong Kong programme misses connection with investors

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Jian Shi Cortesi, investment director at GAM, on how Shanghai-Hong Kong Stock Connect has fared in the year since its launch…

A year into its launch, the Shanghai-Hong Kong Stock Connect has been praised for its success from an operational standpoint, yet trading volumes have fallen far short of expectations and called into question the trading link’s ability to tap into investors’ appetite.

The fundamental challenges for the Stock Connect lie in the differences between the fast-growing but immature A-share mainland stock market and the highly developed Hong Kong stock market. Mainland investors, who typically employ a short-term gambling attitude towards trading and favour sharp bouts of price volatility, have found idyllic market conditions domestically but failed to be lured by the attractive valuations of Hong Kong-listed stocks. For international investors initial interest was also high, but this soon tapered off.

The Stock Connect’s complex regulatory framework has kept at bay a large portion of investors, prompting the supervisory bodies to consider reducing the minimum requirements for trading. Slackening the criteria would not be beneficial to markets. Unsophisticated retail investors do not need more ways to gamble and their volatile trading behaviour could add more risk to the Hong Kong market.

Over time, interest in cross-border trading may develop but we will first need to see a more advanced investment culture on the mainland. Hong Kong’s market is much more institutionalised, whereas the mainland market is dominated by retail investors who pay little attention to valuations.

To help markets mature, China will gradually need to set up a more comprehensive pension system which will provide individuals with well-designed investment options consisting of fixed income and blue-chip stocks. This will ensure that stock investing is no longer a two-week gamble or ‘stock flipping’ exercise and enable Chinese investors to develop a long-term view towards investing. Such an attitude will likely prompt domestic money to flow into Hong Kong stocks trading at large discounts to A-shares.

To attract international investors, China needs to make changes to the stock suspension mechanism to ensure market liquidity during bouts of turmoil. Currently, hundreds of A-shares are still suspended and not tradable. Without addressing this issue, foreign institutions will remain cautious when entering this market.

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