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Hong Kong’s reboot of trading in yuan shares timely, even if it only attracts mainland Chinese investors, analysts say

South China Morning Post logo South China Morning Post 07/10/2021 Enoch Yiuenoch.yiu@scmp.com
Hong Kong might be the largest offshore yuan market, but its total yuan deposit is not big enough for even one week’s turnover at the city’s stock exchange. Photo: Bloomberg Hong Kong might be the largest offshore yuan market, but its total yuan deposit is not big enough for even one week’s turnover at the city’s stock exchange. Photo: Bloomberg

It is the right time to reboot trading in yuan-denominated shares in Hong Kong, even if it only attracts mainland Chinese investors and not international traders, analysts said.

Allowing mainland investors to trade Hong Kong stocks in the yuan through the southbound Stock Connects would promote yuan share trading in the city. A lack of yuan liquidity in the city, however, means international investors will be reluctant to trade in such stocks, while companies will be discouraged from issuing shares in the Chinese currency, according to analysts.

"The yuan is still not an international currency and the pool of offshore yuan available is still relatively small compared with the Hong Kong dollar or the US dollar. When listed companies do fundraising, they would like to access to the maximum amount of investors for best possible pricing and terms. Because of this, the Hong Kong dollar or the US dollar are preferred," said Joseph Tong Tang, chairman of Morton Securities.

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The comments come after Carrie Lam Cheng Yuet-ngor, the city's leader, outlined a number of measures aimed at furthering enhancing the city's role as an international financial hub in her last policy address on Wednesday. One of the measures outlined was allowing mainland Chinese investors to trade Hong Kong stocks in the yuan through the Stock Connects.

The city's Securities and Futures Commission said the same day that it had set up a working group along with the Hong Kong Monetary Authority and exchange operator Hong Kong Exchanges and Clearing (HKEX) to study how to promote yuan-denominated securities in Hong Kong, including allowing mainland investors to use the yuan instead of the Hong Kong dollar while trading local stocks through the southbound Stock Connects.

Chief Executive Carrie Lam Cheng Yuet-ngor during her 2021 policy address in Hong Kong on Wednesday. Photo: Sam Tsang © Provided by South China Morning Post Chief Executive Carrie Lam Cheng Yuet-ngor during her 2021 policy address in Hong Kong on Wednesday. Photo: Sam Tsang

If the regulators allow mainland investors to use the yuan to trade Hong Kong shares through the stock connects, this would only facilitate mainland investors, as they already have the currency on hand, said Morton Securities' Tong said. It would be hard to attract international investors to follow suit, as the yuan is not yet freely convertible, he added.

Hong Kong might be the largest offshore yuan market, but its total yuan deposit stood at 842.7 billion yuan (US$130.7 billion) as of August, far less than its Hong Kong dollar deposit of HK$7.46 trillion (US$958.15 billion) and its US dollar deposit of HK$5.36 trillion (US$688.43 billion). The city's total yuan deposit is not big enough for even one week's turnover at the stock exchange.

But the introduction of cross-border trading schemes since 2014, including the Stock Connects between Hong Kong and Shanghai and Shenzhen, the Bond Connect and the Wealth Management Connect, could prove decisive.

Exchange Square in Hong Kong's Central business district. Hong Kong has permitted trading in yuan-denominated shares for 10 years now, but only a few issuers have taken the yuan route. Photo: Sam Tsang © Provided by South China Morning Post Exchange Square in Hong Kong's Central business district. Hong Kong has permitted trading in yuan-denominated shares for 10 years now, but only a few issuers have taken the yuan route. Photo: Sam Tsang

"Allowing southbound trading under the Stock Connects to be denominated in the yuan could potentially increase the trading volume for HKEX, as the new policy would reduce currency risks for trading mainland stocks via the new yuan counters," said Stephen Chan, partner at legal firm Dechert.

Southbound fund flows from mainland investors trading in Hong Kong stocks through the Stock Connects rose 132 per cent to HK$48.1 billion a day in the first half of this year.

Besides, yuan products are popular in the city's mutual fund markets. The number of yuan-share class funds rose from 191 in 2018 to 295 as of June this year, and represented about 14 per cent of the total funds authorised by the SFC, according to data provided by industry body Hong Kong Investment Fund Association.

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Hong Kong has permitted trading in yuan-denominated shares for 10 years now. HKEX introduced a scheme in June 2011 for listing candidates to sell shares denominated solely in the yuan, or a combination of the yuan and the Hong Kong dollar in their initial public offerings. Existing listed companies can also issue new shares denominated in the yuan through private share placements or rights issues.

But a decade on, only few issuers have taken the yuan route.

The first yuan listing in Hong Kong was in April 2011 by Hui Xian Real Estate Investment Trust, followed by a yuan share placement by Hopewell Highway Infrastructure a year later. There are also 42 exchange-traded funds and 81 debt securities that are denominated in the yuan currently traded in Hong Kong, but have little turnover.

Hopewell Highway, which changed ownership and was renamed Shenzhen Investment Holdings Bay Area Development, is the only Hong Kong-listed company to have shares trading in both the yuan and Hong Kong dollar. But its turnover stood at only 22,850 yuan worth of shares, fewer than its HK$336,350 worth of Hong Kong dollar shares, on Thursday.

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This article originally appeared on the South China Morning Post (www.scmp.com), the leading news media reporting on China and Asia.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.

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