What is the “Stock Connect”?

September 6, 2021

Category:

2 min read

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Origins

The Shanghai-Hong Kong Stock Connect was launched in November 2016, as a way to link the markets of mainland China with that of Hong Kong. It has since been extended to include the tech-heavy Shenzhen Stock Exchange, in 2016. 

Hong Kong has, since being returned to China by the United Kingdom in 1999, been ruled under a “one country, two systems” model. This has allowed Hong Kong for much of that period to be much more independent and pro-democracy than mainland China, though this has changed significantly over the last few years. Similarly, it has allowed its markets to attract more foreign investment, as they have been more open and less subject to party control.

Overview

The Stock Connect has allowed certain, eligible investors on the mainland to buy shares of eligible companies listed in Hong Kong and for foreigners to buy shares listed on the mainland, without the restrictions previously employed. By this method, investors on both sides of the Connect are able to trade using local brokers and clearing houses, which had previously hampered the ability of investors to trade in the markets.

This benefits Chinese companies, which get greater access to investors and their capital, and investors, who are able to diversify their portfolios further into one of the largest economies in the world. Blue-chip Chinese companies are often seen as safe bets by investors, as the Chinese Communist Party has been loath to let them fail. However, even CCP patience has been worn thin by Evergrande, a property giant, which built many of its projects on the back of $300bn of liabilities and is likely to default on interest payments without significant government intervention.

Verdict

There is further ambition to build a Shanghai-London Stock Connect, which would bring together one of the largest international markets, in London, and one of the fastest growing and largest domestic markets. 

The London Stock Exchange has fallen somewhat from its position as one of the pre-eminent bourses in the world, as it has maintained strict rules regarding share classes and has failed to attract listings from the fast-growing tech sector. Many start-ups now wish to split company shares into two categories, one of which is not offered to the public and offers the founders many more votes per share, allowing them to maintain control of the company after it goes public. The tech sector over the past twenty years has become the most important sector for stock market growth, it now makes up 40% of the S&P 500’s value, an index of America’s largest companies, whereas it makes up less than 2% of the FTSE 100’s.

The opportunity to use the LSE to buy shares on mainland China would draw many investors, along with their capital, back to the City. This would have the added effect of encouraging more companies to list in London, as they would see the deepened pools of investors as an opportunity to raise more capital through IPOs.

Report written by Joshua White

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