Despite China’s current macroeconomic challenges, international investors have shown renewed interest in the country's equity markets.

Stock Connect, the mutual market access programme between mainland China and Hong Kong, has seen increased trading volumes in 2024, driven by the strong stock market performances on both sides following the central government’s recent stimulus measures.

As of November 8, the CSI 300 index has risen 21.19% year-to-date, attracting both Hong Kong and international investors to invest in mainland Chinese equities.

“As of the end of September 2024, the total portfolio value managed by Central Clearing and Settlement System (CCASS) accounts has exceeded 2.3 trillion yuan (US$320 billion). We are seeing renewed interest in A-shares,” says Tae Yoo, managing director of global client development, markets, at Hong Kong Exchanges and Clearing (HKEX), speaking with The Asset in an exclusive interview.

Tae Yoo: "We are seeing renewed interest in A-shares."

The portfolio value for CCASS peaked at 2.5 trillion yuan in 2021, but it declined over the following two years, stabilizing around 2 trillion yuan. However, it has picked up again this year after the central government introduced a series of stimulus measures.

Northbound Connect, which enables international and Hong Kong investors to trade A-shares listed on the Shanghai and Shenzhen Stock Exchanges, offers distinct advantages over traditional onshore access channels like the Qualified Foreign Investor (QFI) scheme. One of its key differentiators is its accessibility and efficiency, allowing global investors to trade A-shares without the need for local licences or extensive regulatory approvals.

To further enhance this experience, HKEX introduced the Special Segregated Account (SPSA) service in 2015, which enables pre-trade checking while maintaining asset segregation. This innovation has been instrumental in addressing concerns around operational complexity and ownership transparency. SPSA registration has seen widespread adoption, with over 19,000 global funds opting for the service.

“If we look at the growth trajectory of SPSA accounts, it has demonstrated strong momentum, with a compound annual growth rate (CAGR) exceeding 20%,” says Yoo.

Southbound transactions have also seen significant interest from mainland investors in Hong Kong securities. Southbound Connect refers to the part of the Stock Connect programme that allows mainland investors to trade shares listed on the Hong Kong Stock Exchange.

“We have a very robust Southbound Connect business as well. CCASS, together with the China Securities Depository and Clearing Corporation, manages mainland investors’ funds. As of the end of September 2024, these investments in the Hong Kong market amounted to approximately HK$3.2 trillion (US$411.68 billion). On average, mainland investors contribute between 20% to 25% of the daily turnover in our cash market,” says Yoo.

Innovations

HKEX is continually enhancing its technology infrastructure to support more efficient and secure market operations. One of its innovations is HKEX Synapse, launched in October 2023 as a key enhancement to Stock Connect. It utilizes DAML (digital asset modeling language) smart contracts to standardize and streamline post-trade workflows, improving operational efficiency and transparency while reducing settlement risks.

“Compared to conventional stock settlement, Synapse allows users to settle all their trades within 97 minutes after the market closes. Typically, this process takes around four hours. With Synapse, investors can trade right up until the market close, thanks to the real-time settlement mechanism that significantly accelerates the process. This provides additional investment opportunities, as traders effectively gain 20% more trading hours. However, it is still in its early stages and market adaptation will take time,” explains Yoo.

Preparing for T+1

Since May 28, the US Securities and Exchange Commission has implemented a new T+1 settlement cycle for most routine securities transactions. This change shortens the settlement period for most securities trades from two business days after the trade date to one business day. In Hong Kong, the settlement cycle remains at T+2, but the government is moving swiftly towards accelerating the settlement cycle to align with global standards.

“T+1 is technically feasible, meaning CCASS will be ready by the end of 2025. However, that doesn’t necessarily mean we will implement it immediately after,” says Yoo. “We are moving through several phases to ensure a smooth transition.”

“First, we will publish a white paper detailing what T+1 involves and the reasons for its introduction. After obtaining regulatory approval, we will engage in a public consultation to gather feedback. Only then can we make an informed decision about implementing T+1. One of the key considerations for adopting T+1 is reducing settlement risk, which is crucial for maintaining resilience and scalability in the market,” he adds.