Hong Kong Exchanges in Talks With China Bourses on Mutual Access

Hong Kong Exchanges & Clearing Ltd. said it’s in talks with mainland counterparts on establishing mutual access after a Chinese newspaper reported that Shanghai’s bourse may pass stock orders for overseas markets to HKEx for execution.

Talks continue and no agreement has been made, Hong Kong Exchanges said in a statement yesterday evening. The company’s shares jumped 5.4 percent to HK$126, the most since January 2013, with trading volume more than four times its 20-day average before being suspended at 3:12 p.m. Trade will resume today, HKEx said in the statement.

The 21st Century Business Herald reported earlier that foreign investors may be able to directly buy mainland-listed stocks through the Hong Kong exchange, without saying where it got the information. Mainland individual investors would access overseas markets through the Shanghai bourse and executed by HKEx, the newspaper also said.

Given yesterday’s report, “investors will likely start factoring additional revenues for Hong Kong Exchanges, even if actual clearance may be some time away,” said Sandy Mehta, chief executive officer of Value Investment Principals Ltd. in Hong Kong. “Timing of the actual government approval is hard to say, and it may also be linked to what the Chinese authorities have in mind for their currency. There are likely some developments taking place.”

The Shanghai Stock Exchange has noted media reports about mutual market connectivity initiatives with Hong Kong, and HKEx’s statement is consistent with the actual situation, the mainland bourse said on its microblog.

Expanding Access

Hong Kong and China are in talks to expand mutual access, paving the way for the cross-selling of funds and easier access to capital markets for investors and companies. The People’s Bank of China said in January last year that it has started preparations for the qualified domestic individual investor program, or QDII2, which will enable individuals to invest in overseas capital markets.

“QDII2 has been talked about for a while,” said Linus Yip, a strategist at First Shanghai Securities Ltd. who owns HKEx shares. “It’s good for HKEx but it would depend on the quota amount, and whether investors would like to put their stake” in Chinese shares.

Before its statement to the exchange, Hong Kong Exchanges had declined to comment on the 21st Century Business Herald report.

Mutual Market

“Achieving a breakthrough in mutual market access via partnership with mainland counterparties is part of HKEx’s Group Strategic Plan 2013-2015,” Hong Kong Exchanges said in an e-mailed statement in response to questions on the progress of talks on mutual market access. “HKEx will continue its efforts in this regard.”

Two calls to the China Securities Regulatory Commission went unanswered yesterday. Shanghai’s exchange operator didn’t immediately respond to questions sent by fax from Bloomberg News.

The technology required for the arrangement has been put into the Shanghai exchange’s 2014 work plan, according to the 21st Century Business Herald report. The quota for purchases for the plan hasn’t been decided yet, the newspaper said.

Hong Kong Exchanges has been building closer ties with mainland bourses. The exchange in 2012 formed a joint venture to develop index-linked and equity derivative products with its mainland Chinese counterparts.

The city’s bourse, which plans to announce new commodity products, wants partnership with China’s exchanges, global markets co-head Romnesh Lamba said yesterday at a conference.

Expanded Program

In August 2007, China unveiled a so-called “through-train” program, in which citizens could invest directly in Hong Kong stocks, helping to push the benchmark Hang Seng Index to a record that October. China scrapped the plan in January 2010 and instead expanded a program under which Chinese institutions can invest in overseas markets.

The People’s Bank of China has approved a plan for trials in the cities of Guangzhou and Shenzhen that allows qualified individuals to make investments overseas, the Shanghai Securities News reported in June, citing Wang Jingwu, head at the central bank’s Guangzhou branch. Plans for the trials have been submitted to the State Council for approval, the report said.

“More direct market access for foreign investors into Chinese mainland markets is only a matter of time,” said Mehta. “China continues to grow in stature in the global economy, and soon the mainland stock markets will over time be as accessible as Hong Kong’s markets are to global investors. The timing of this depends upon government authorities, but it is likely a question of when, and not if.”

Before it's here, it's on the Bloomberg Terminal.