Author: Yu Lingqu, Research Fellow at Department of Finance Industry
Editor’s Note: Shenzhen-Hong Kong Stock Connect marks steady progress toward building a law-regulated and internationalized capital market. It is expected to unleash great potentials.
“The basic preparation for the Shenzhen-Hong Kong Stock Connect has been completed and the State Council has approved the implementation plan for the program," Premier Li Keqiang said on August 16, 2016. The initiative for the interconnection between the stock markets of the Chinese mainland and Hong Kong marks steady progress toward building a law-regulated and internationalized capital market.
In recent years, China has taken a series of reform measures to explore the further opening of the financial sector, including: expanding the investment quota of RMB Qualified Foreign Institutional Investors (RQFII) and Qualified Foreign Institutional Investors (QFII), opening the free trade account for Shanghai free trade zone (FTZ), promoting the inclusion of RMB in the SDR basket, and launching Shanghai-Hong Kong Stock Connect. All of these steps have contributed to RMB internationalization. In comparison with the above measures, however, Shenzhen-Hong Kong Stock Connect has its unique advantages and is therefore expected to unleash great potentials.
First, Hong Kong's position as the global RMB offshore financial center and Asia’s wealth management center will be further consolidated. Shenzhen-Hong Kong Stock Connect will allow international investors seeking high returns to use Hong Kong as a platform to invest in China’s most dynamic enterprises listed on Shenzhen Stock Exchange (SZSE) which is featured by SME Board and ChiNext. This will in turn promote international wealth management institutions to continue their agglomeration in Hong Kong.
Second, Shenzhen’s role as the innovation center for science and technology industry will be promoted. Shenzhen-Hong Kong Stock Connect focuses on long-term, institutional arrangements for connectivity. In this way, SZSE ChiNext will learn from successful experience of the American NASDAQ to improve its internationalization, regulation, and marketization. Thus, a more mature ChiNext, with stronger service ability, will support Shenzhen as an innovation center.
Third, unprecedented breakthroughs will be made in building a global financial center through Shenzhen-Hong Kong cooperation. According to the Global Financial Centers Index (GFCI) report published by the City of London Corporation, only New York and London can be called “Global” financial centers. Both Shenzhen and Hong Kong have accumulated huge financial resources, and they are naturally complementary. If their financial resources are integrated, the size of the capital market and the added value of the financial sector will be close to, or even surpass, those of New York or London. Thus, Shenzhen and Hong Kong can turn into a global financial center, which would improve the international competitiveness of China's financial sector and its ability to serve the real economy.