Stock Connect at 10: it began with notes on a tablecloth – what will a new decade bring?

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The exchange link between Shanghai and Hong Kong went live on November 17, 2014

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Zhang Shidongin ShanghaiandEnoch Yiuin Hong Kong

Published: 9:30am, 16 Nov 2024Updated: 9:40am, 16 Nov 2024

On an afternoon in December 2012, Charles Li Xiaojia, the CEO of Hong Kong’s stock exchange operator, sat with Shanghai bourse chairman Gui Minjie in a Shenzhen teahouse. During their discussion, which lasted less than an hour, they scribbled down plans to link Asia’s two largest stock markets – on the corner of a tablecloth.

What started on that teahouse tablecloth has become a conduit through which international investors can access China’s US$10 trillion onshore stock market, while their counterparts on the mainland can diversify their portfolios by trading Hong Kong-listed equities.

Since the floodgates opened 10 years ago, overseas investors using the Stock Connect programme – which brought Shenzhen into the fold in 2016 – have bought a net of 1.8 trillion yuan (US$249.2 billion) worth of Chinese stocks, while mainland buying of Hong Kong shares has totalled HK$3.4 trillion (US$437.2 billion), according to Hong Kong Exchanges and Clearing (HKEX). Over the past decade, foreign holdings of Chinese stocks have jumped more than 20 fold, according to data from the bourse.

The link is especially critical because unlike Hong Kong and other developed markets around the world, China’s capital accounts are not fully open, with restrictions on both inbound and outbound investments in securities.

While there have been a number of successes since 2014, investors who used the programme to bet on Chinese stocks would have been better off putting their money into the S&P 500 over the past decade. And the Stock Connect faces a number of headwinds presented by the re-election of Donald Trump as US president.

Former Hong Kong Exchanges and Clearing CEO Charles Li Xiaojia. Photo: Xiaomei Chen

The exchange link, which went live on November 17, 2014, has easily surpassed the qualified foreign institutional investor (QFII) programme to become the primary tool for overseas traders to tap into China’s yuan-denominated stocks. QFII, which commenced in 2002 as the China market was opening up to the world, requires a lot of paperwork and onerous government approvals before investments can be made.