HKEX Insight

Mainland investor activity in Hong Kong’s equity market has grown over the years.

Average daily turnover (ADT) on Southbound Stock Connect has grown from HK$0.9 billion in 2014 to HK$38.3 billion in the first three quarters of 2024, according to HKEX data.

Between July 2023 and September 2024, Southbound Stock Connect recorded 15 consecutive months of net buying activity, indicating growing demand from Mainland China investors.

Southbound Stock Connect ADT, 2014 – Sep 2024 (RHS: % of Hong Kong market ADT)

Source: HKEX data. Note: ETFs included.

Since 2018, the market capitalisation of securities portfolios held through Southbound Stock Connect has grown from HK$789 billion to HK$3.4 trillion by the end of the third quarter of 2024.

Southbound Stock Connect Portfolio Value,2018 – end of September 2024 (HK$ Billions)

Source: HKEX data. ETFs included.

On top of rising liquidity, the investment product ecosystem open to Southbound Stock Connect investors is growing deeper and more diverse.

Eligible securities have been expanded to include companies with a weighted voting rights (WVR) structure since August 2019; pre-profit biotech companies since November 2020; selected Hong Kong-listed ETFs since July 2022; and, most notably, eligible international companies since March 2023.

Eligible companies must be primarily listed in Hong Kong and are either constituent stocks of the Hang Seng Composite LargeCap Index or Hang Seng Composite MidCap Index, or constituent stocks of the Hang Seng Composite SmallCap Index with a market capitalisation of at least HK$5 billion.

In September 2024, Mainland investors could trade a total of over 550 Hong Kong-listed securities through Shanghai and Shenzhen Connect, nearly double the number of eligible securities at the launch of Southbound Stock Connect in 2014.

Looking at capital pools in Mainland China alone, the potential for future growth, and increasing flows through Southbound, look strong.

Driven by rapid economic growth and accumulation of wealth since the 2000s, China’s total household asset structure (including non-financial assets like property) is estimated to exceed RMB1,000 trillion by 2030 ^[1]

Given the underinvestment in overseas assets by Mainland China investors, there remains significant potential for Southbound Stock Connect flows to increase in the future.

For example, a report compiled by the International Monetary Fund (IMF) estimated that Mainland investors’ overseas portfolio investment as a percentage of GDP stood at 6.1% in 2020, compared with 70.1% in the US and 114.7% in Germany.

[1] Source: HKEX internal research, 2023

In April 2024, the China Securities Regulatory Commission (CSRC) announced five measures to support Mainland-Hong Kong connectivity.

The five measures include:

1. Expanding the scope of eligible ETFs under Stock Connect:The expansion aims to broaden the range of ETFs available for trading between Mainland and Hong Kong markets. By relaxing the eligibility criteria, more ETFs can be included in Stock Connect, attracting more investors to participate in cross-border trading and supporting the development of Hong Kong as an international asset management centre.
   
   On 22 July 2024, six new ETFs were added to Southbound Stock Connect and 85 new ETFs to Northbound Stock Connect, taking the total on each channel to 16 and 225, respectively, and marking an increase from the four on Southbound and 83 on Northbound Stock Connect when ETFs were first included in July 2022.
   
   
2. Including REITs into Stock Connect: According to the measures, eligible Real Estate Investment Trusts (REITs) from both the Mainland and Hong Kong will be included in Stock Connect, following the arrangements for Stock and ETF Connect. This inclusion would potentially enhance liquidity, offering investors more opportunities to diversify and invest in the real estate sector.
   
   
3. Supporting the inclusion of RMB-denominated stocks into Southbound Stock Connect: This measure builds on the HKD-RMB Dual Counter Model (DCM) launched on 19 June 2023, which offers Hong Kong investors a choice of trading the shares of Hong Kong-listed companies in either HKD or RMB. Currently, only HKD Counters of eligible securities are included in Southbound Stock Connect.
   
   Since the launch of DCM, the Mainland and Hong Kong exchanges and clearing houses have been actively researching how to include RMB-denominated stocks in Southbound Trading. A preliminary consensus on the business plan has been reached, and the next step is to advance launch preparations – a delivery timetable will be announced to the market at an appropriate time.
   
   
4. Optimising mutual recognition of funds: This measure proposes promoting the moderate relaxation of the proportion limit for cross-border sales of mutual recognition of funds (MRF), optimising the MRF arrangement to better meet the needs of investors in Mainland China and Hong Kong.
   
   
5. Supporting the listing of leading Mainland companies in Hong Kong: The CSRC aims to further strengthen communication and coordination with relevant departments to support eligible leading Mainland companies in listing and financing in Hong Kong. This will support the regulated development of Mainland companies in leveraging the two markets and potentially lead to an increase in IPO activities and enhance the dynamism of Hong Kong’s equity market.

Looking ahead, there’s significant scope to further enhance Southbound Stock Connect.

One enhancement currently in the pipeline is adding block trading. Block trading will enhance price discovery functions and facilitate trading activities of eligible stocks of both domestic and international companies included in Stock Connect. For institutional investors, block trading can minimise trading costs and facilitate arbitrage and hedging activities.

The Hong Kong Securities and Futures Commission (SFC) and CSRC reached consensus in August 2023, proposing the introduction of block trading under Stock Connect. HKEX is currently working closely with related parties in Hong Kong and Mainland China to develop an implementation plan.

The Connect programmes have succeeded in connecting China and the world, and vice versa.

Southbound Stock Connect, coupled with new counters, products, and inclusion of the game-changing international companies, has a key role to play in the coming years, connecting the capital flows between Mainland and Hong Kong that will strengthen the role and attractiveness of Hong Kong as a key fundraising hub and international financial centre.

1. What is Stock Connect?

Stock Connect is a Mutual Market Access Programme through which investors in Mainland China and Hong Kong can invest in each other’s markets. Stock Connect has two parts: Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect.

2. When did Stock Connect start? 

Stock Connect launched on 17 November 2014 with the Shanghai-Hong Kong Stock Connect. The Shenzhen-Hong Kong Stock Connect launched on 5 December 2016.

3. What is Southbound Stock Connect? 

Southbound Stock Connect allows qualified Mainland investors to trade eligible shares listed in Hong Kong. To find out about eligible shares for Southbound trading, click here.

4. What is the impact of Southbound Stock Connect? 

Southbound Stock Connect has facilitated the flow of capital from Mainland China into Hong Kong’s equity markets and overtaken the Qualified Domestic Institutional Investor (QDII) scheme as the preferred route for Mainland investors seeking to allocate their capital overseas.

5. What is the difference between Northbound and Southbound Stock Connect? 

Southbound Stock Connect allows qualified Mainland investors to trade eligible shares listed in Hong Kong. Northbound Stock Connect allows Hong Kong-based investors to trade eligible A-shares on either the Shanghai or Shenzhen Stock Exchanges.

6. As an issuer, how can I participate in Southbound Stock Connect?

According to the rules, constituent stocks of the Hang Seng Composite LargeCap Index, Hang Seng Composite MidCap Index, and Hang Seng Composite SmallCap Index with a market capitalisation of at least HK$5 billion are eligible to be included in Southbound Stock Connect.

Besides, companies with Weighted Voting Rights (WVR) structures, upon satisfaction of various prerequisites, can also be included into the eligible stocks under Southbound Stock Connect.

7. What can investors buy and sell through Southbound Stock Connect?

For the most up-to-date information on Stock Connect, please refer to the detailed FAQs here.

8. What was the ADT volume of Southbound Stock Connect in 2024?

ADT volume of Southbound Stock Connect in June 2024 was HK$38.5 billion, according to HKEX data. For more statistics, please visit the HKEX Annual Market Statistics site here.

9. Which stocks are most actively traded on Southbound Stock Connect? 

Data on the most actively traded stocks can be found on the HKEX Stock Connect Statistics, which offers daily and monthly statistics on trading activity on the Southbound and Northbound channels. Click here. 

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