Southbound capital flow – Transforming the future of Hong Kong markets
Jul 21, 2020

By Romnesh Lamba, Co-President of HKEX

Hong Kong’s role as an international financial centre has grown exponentially in recent years as the city has played a major part in the facilitation of the flow of capital into, and out of China. It has help fund the growth aspirations of Mainland business and has supported both regional and international investors in gaining access to the Mainland. The next decades-long phase of development for Hong Kong’s capital markets will be to build on this, enabling Mainland China to diversify internationally, and further reinforce Hong Kong position as Asia’s premier global financial city

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Hong Kong has played a critical role in the opening of Mainland China capital markets in recent decades, and much of that development has been in facilitating northbound capital flow, creating  ways for international investors to participate in China’s economic growth. The next chapter in Hong Kong’s development, which could  take decades to fully unfold, will focus on facilitating the southbound flow of capital, as China’s huge pool of savings seeks broader and more diversified investment opportunities.

At HKEX we are celebrating the 20th anniversary of own share listing, which gives us an opportunity to look back at our success and consider how our business will change in the future. What is certain is that central to our future is our continued connection to China, and the links we provide to international markets.

First Port of Call

Between 2014 and 2017, Hong Kong Exchanges and Clearing Limited (HKEX), in partnership with other exchanges and regulators, introduced a series of mutual access schemes to connect Mainland China financial markets with the world. Today, Stock Connect, both Northbound and Southbound, and Bond Connect together account for approximately RMB 2 Trillion in annually traded volumes These pioneering projects, which at their design phase were daunting from a regulatory, technical and procedural point of view, have defined HKEX’s growth in recent years.

As China continues to develop its domestic economy and looks to ways to loosen its capital controls, Mainland China investors will search for more opportunities to diversity their investments and to enter global capital markets. Hong Kong will be their first port of call.

The sheer number of investors, their unique investing values and their insatiable appetite for returns, will likely have a structural impact on global capital markets. We expect this will strengthen HKEX’s role as the global markets leader in the Asian time zone. Hong Kong will be the trading and risk management centre for Mainland China’s individual and institutional investors seeking international exposure, when that time comes.

 

Our Foundation

Hong Kong has become a sizeable and increasingly diverse, broad and deep capital market in the last decade, and that will make it hard for other jurisdictions to unseat it as the gateway for capital flowing in and out of Mainland China. Hong Kong is the world’s leading offshore renmenbi market, which was one of the most important factors in successfully facilitating the Connect schemes. Hong Kong’s market, financial and monetary regulators have created close, collaborative relationships with regulators in Mainland China in a relationship that has been many years in the making.

Hong Kong has also attracted a unique ecosystem of market participants, from Chinese banks, insurers and investment funds to international trading houses to highly specialised legal and accounting talent. HKEX has built an efficient and broad multi-asset trading and clearing platform to provide the end-to-end infrastructure that markets need to thrive. We offer everything from equities to bonds, currencies and commodities; from cash products to derivatives and structured products. We have built this on a foundation of world-class legal, regulatory and capital structures. This is a complete and multi-faceted ecosystem that would be very hard to replicate elsewhere in Asia. The innovation and engineering now inherent in our framework has set the stage for Hong Kong to serve as the conduit for Mainland China investors seeking international opportunities

By offering a wide range of assets and products, HKEX can ensure that we will be the one-stop-shop that Chinese investors come to when they want to invest internationally. And in turn, international investors will use this market to trade Asia, in Asia. This was made evident by MSCI’s decision to partner with HKEX to introduce futures and options contracts on a suite of MSCI’s Asia and Emerging Markets indices. This international vote of confidence in our markets highlights the relevance of Hong Kong to the global trading community. Enhancing our post-trade synchronisation with Mainland China markets is another area of focus, and we also see many opportunities for growth in our fixed income and currency trading business. Capturing these opportunities will only serve to reinforce Hong Kong’s role as the East/West connector.

 

Connecting China, Connecting the World

Amid increasing macro economic and geopolitical uncertainties, HKEX has recorded record trading volumes and a robust pipeline of companies that want to list their shares here. Hong Kong is proving itself to be more relevant than ever

HKEX has built its unique role and reputation as the global markets leader in the Asian time zone on connecting China with the world. That position will only become stronger as we collaborate with our customers, partners and investors in Hong Kong, Mainland China and around to the world to being even greater connectivity and depth to our market.

 

Credit: This article first appeared in Singtao Daily  on 21 July,2020