Connecting China
A New Stock Market Model

Charles Li and Katherine Tweedie

Evolution of China’s Capital Markets

The Shanghai-Hong Kong Connect programme will pave the way for greater financial integration with the rest of the world.

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In November 2014, the eagerly-awaited Shanghai-Hong Kong Stock Connect system went live. The scheme, which establishes mutual stock market access between Hong Kong and mainland China, is a major step forward towards opening Chinese capital markets to foreign investors and providing a wider range of options for China’s expanding middle classes to channel their savings.

Charles Li, the Chief Executive of Hong Kong Exchanges and Clearing, tells us that Stock Connect has provided international investors with an aggregate quota of RMB300 billion (US$50 billion) of exposure to Shanghai-listed A-shares. Those institutions that already have exposure to the onshore markets through Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor quotas can use Stock Connect to increase their A-share exposure, but the change is more profound for domestic investors as it is the first system to enable them to invest abroad.

Stock Connect has provided international investors with an aggregate quota of RMB300 billion (US$50 billion) of exposure to Shanghai-listed A-shares.

Li explains that China sees the Shanghai-Hong Kong link up as the first step in a programme of mutual market access arrangements that may ultimately include the Shenzhen Stock Exchange and span multiple asset classes including bonds, commodities, currencies, derivatives, exchange-traded funds, small-cap equities and stock-index futures.

According to Li, the northbound Stock Connect – investing into Shanghai – is primarily used by institutional investors, which tend to have longer-term investment horizons than the retail-investor-dominated southbound channel. China hopes that involving such disciplined investors in the onshore markets will help dampen excessive, sentiment-driven volatility and aid the case for A-shares to be included in key international equity indices.

China sees the Shanghai-Hong Kong link up as the first step in a programme of mutual market access arrangements that may ultimately include the Shenzhen Stock Exchange and span multiple asset classes.

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2.3

Getting To Know You: Corporate Governance in China

Therese Niklasson

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