Hong Kong Budget: Inflows Uncertain Under RMB-Denominated Stock Connect | Fund managers

Hong Kong authorities have offered to allow renminbi-denominated stocks to trade through the city’s Southbound Stock Connect platform, in a tactical move aimed at encouraging more inflows from the mainland from China.

However, it remains unclear whether this will actually happen, as many mainland investors who buy Hong Kong stocks tend to add offshore Hong Kong dollar positions.

THE GREAT PLAN

Hong Kong Financial Secretary Paul Chan Mo-po announced on February 23 in the Budget 2022-23 that Hong Kong regulators, namely the Securities and Futures Commission, Hong Kong Exchanges and Clearing and the Hong Kong Monetary Authority, have completed a feasibility study on allowing shares on the Southbound Stock Connect to be denominated in renminbi.

The special administrative region government will start preparing and discussing the arrangement with mainland regulators, Chan said.

To encourage capital inflows, the government will introduce support measures, such as the removal of stamp duty on share transfers to increase the liquidity of renminbi-denominated shares.

Alicia Garcia Herrero,

Natixis BFI

At present, when Mainland China investors buy Hong Kong stocks via Stock Connect, they have to exchange money in Hong Kong dollars to trade, which causes inconvenience and may be affected by the exchange rate fluctuations.

“As the Hong Kong stock market is in such a bearish situation, there is a reason to support the market, especially with the reported lockdown to come during the fifth wave of the Covid outbreak, posing difficulties for public offerings. initials and more,” Alicia Garcia said. Herrero, Chief Apac Economist at Natixis Corporate & Investment Bank.

When the new renminbi-denominated trading becomes available, Garcia Herrero thinks more inflows from the mainland can be expected to support the market.

However, Stephen Chiu, head of Asia FX and rates strategist at Bloomberg Intelligence, doubts there will be any significant renminbi inflows in the near term, as many mainland investors buying Hong Kong stocks are doing so. to divest themselves of their onshore investments.

“I’m skeptical about the influx it can bring [in the short term]”, said Chiu. “China wants to do it for sure, to help the use of the yuan and the long-term goal of internationalization of the yuan. It’s absolutely ideal.

Stephen Chiu,

Bloomberg Intelligence

But in reality, a major driver of H-share purchases by mainland investors is the divestment of onshore assets. For those investors, despite the AH discount on some Chinese companies, the new measures offer the “same difference” and they can stick to trading the Hong Kong dollar, Chiu said.

GREEN BOND PLAN

In the latest budget, Finance Secretary Chan also said that in 2022 Hong Kong will continue to issue green bonds totaling around $4.5 billion.

Since 2018, Hong Kong has issued the equivalent of over $7 billion in green bonds targeting global institutional investors. Last year, the Shenzhen municipal government issued renminbi green bonds in Hong Kong; it was the first city to do so, setting an example of green financing based on Hong Kong bonds in the Greater Bay Area.

While China and the European Union released their own versions of the sustainable finance taxonomy last year, Natixis NIB’s Garcia Herrero believes Hong Kong would be a good destination for mainland bond issuers looking to raise green US dollars for industrial transition, to reconcile the difference in ESG standards.

For foreign investors, Hong Kong can be seen as a more “credible” green bond market, using a mix of ESG standards drawn from China and EU taxonomies. “It can have a faster growing green bond market than the continent in that sense,” she said.

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