[ U P D AT E ]
China-UK access
scheme expected
to take shape
CHINA’S CAPITAL MARKET
REFORMS – HAVING FACED
POINTED QUESTIONS ABOUT
THEIR VIABILITY AND DU-
RABILITY INITIALLY – ARE
STEAMING AHEAD.
O
nly two years ago at the then NEMA
Conference in Shanghai were industry
experts casting doubt on Bond Connect,
describing the scheme as an outlandish
non-starter. Today, Bond Connect is the
most popular China access channel for
foreign investors with early volumes and
registrations trumping previous market
entry schemes like Stock Connect and direct
CIBM (China Interbank Bond Market).
The next 12 to 18 months could well see
the introduction of IPO Connect and ETF
(Exchange Traded Fund) Connect, enabling
investors in China and Hong Kong respec-
tively to subscribe to primary issues and
acquire ETF products. To date, Hong Kong
has been the only market to participate in
the “Connect” schemes, mainly because of
the intrinsic relationship between regulatory
agencies in both jurisdictions.
Ever since the launch of Stock Connect in
April 2014, there has been rampant conjec-
ture that more markets beyond Hong Kong
will be invited to join the Connect party,
including Singapore, Taiwan and Korea.
An outlier to this group has always been
the UK, a country which has forged close
commercial links with China and was the
first market to issue renminbi denominated
debt.
According to Gary O’Brien, head of custody
product, Asia-Pacific at BNP Paribas Securi-
16
Global Custodian
Spring 2018
ties Services, there was no noise to suggest
that regional markets would be invited to
join Stock Connect, but positive sounds
were being made about the UK. A feasibility
study exploring the logistics of a UK-Shang-
hai Stock Connect was first launched in 2015
but conversations were derailed following
the Brexit vote less than one year later.
The idea, however, has undergone a bit
of re-launch following confirmation from
the UK government that both countries
had agreed to speed up development of a
London-Shanghai Stock Connect, and launch
a study assessing the practicality of a Bond
Connect and Mutual Recognition of Funds
(MRF) equivalent. “A UK-China Stock Con-
nect would provide Chinese investors with
access to the UK equity market, but would
also enable European and potentially US
investors to trade China A Shares through
the London linkage,” said O’Brien.
In terms of any UK-China Stock Connect
launch, O’Brien said mainland regulators had
a solid track record of implementing reforms
quickly as evidenced by the seven weeks it
took to unveil Bond Connect following its
first announcement. “China is keen to sup-
port the internationalisation of the RMB,
and an expedited launch of UK-China Stock
Connect would help serve that objective,”
he said.
Industry experts have expressed mixed
opinions about the workability of a Lon-
don-Shanghai Stock Connect. Glaring red
flags which may impede the idea’s success
include Chinese limitations on short-sell-
ing; divergent settlement time-frames and
the use of renminbi in settlements. Most
significant is that Shanghai’s time zone
is eight hours ahead of London, creating
inevitable trade settlement challenges. A
London-Shanghai Stock Connect would also
face problems around capital controls while
foreign investors have also criticised the fre-
quency at which share trading is suspended
on the mainland.
NEXT ISSUE OF GC:
China special: With MSCI formalising
China’s entry into its emerging market
index and banks incorporating China’s
bonds into their indices, a ton of
passive funds are going to move into
China, but can the country handle
such large trading volumes?