The last time I sat down to write a blog, I wrote about the exciting new developments in our Connect Story; the next chapter in our journey and one full of enhancements, innovations and new initiatives to come.

Now, nine months later, post-pandemic Hong Kong is getting back to its bustling, dynamic self, welcoming a total of 7.3 million visitors from around the world so far this year. And that vibrancy and hum of activity is certainly being reflected in this new Connect Chapter.

12 months, many new connections

In the last 12 months, we have expanded and enhanced our Connect programmes more times than in the entire nine years since we launched Shanghai-Hong Kong Stock Connect in 2014.

Starting with the launch of ETF Connect in July 2022, the pace picked up in March 2023 with an expanded range of investible shares in Stock Connect, plus more trading days and the inclusion of international companies.

This was recently followed by the launch of Swap Connect in May 2023; and last month we went live with the HKD/RMB Dual Counter Model. These Connect advances are the building blocks of our future and are foundational to the trajectory of Hong Kong’s financial markets.

Perhaps even more significantly though, these developments mean that we are building even deeper and broader expertise in Connecting China and the World – at a time when, in contrast, the narrative of ‘fragmentation’ and ‘decoupling’ pepper the news agenda. 

In an era of fragility, the world needs more connections, not less. The ties we have built and the opportunities we are creating demonstrate the vital role that capital markets play – and must play – in linking East and West and the financial sector with the real economy and in creating a shared, successful and sustainable future for us all. 

Connecting two pools of capital

These Connect advances also mean that new, vital building blocks are being put in place, creating a rich ecosystem to accelerate two-way capital flows between China and the world, reinforcing Hong Kong’s role as an IFC and supporting our own communities’ continued prosperity.

Since launch, our Connect programmes have gone from strength to strength: today 70% of international investors’ A share holdings are held through Stock Connect; and similarly, around 70% of international investors’ total onshore bond transactions in the interbank bond market are executed through Bond Connect. 

These are the pipes and platforms that are facilitating a better connected world.

Now, with a steady stream of additional enhancements rolling out, coupled with the inclusion of eligible international companies in Southbound Stock Connect since March 2023, Hong Kong has something even more unique, something special, something no other financial centre has - something that creates incredible opportunity for issuers and investors from around the world.

What is this? It is that Hong Kong is home to the only market in the world offering connectivity to two massive, uncorrelated pools of capital.

A market where companies looking to fund their growth ambitions can access both the global investor pool in Hong Kong and the sizeable, largely untapped, fast-growing investor base in Mainland China. This adds a whole new dimension to Hong Kong as an IFC.

The liquidity opportunity generated from Mainland China alone is very significant. The Mainland has a vast retail investor population, estimated at 212 million – equivalent to the population of Brazil – with a massive collective buying power, which drives A-share turnover on the mainland exchanges of close to RMB 1 trillion per day.

We see considerable scope for that opportunity to grow.

For example, a huge proportion of household wealth – estimated at around USD 35 trillion in 2020, or more than 40% – remains allocated to real estate, according to the National Institution for Finance & Development (NIFD). This offers significant opportunity for diversification.

Further, the amount of household savings held in bank deposits is also significant. According to data from the People’s Bank of China, total household deposits reached RMB 151 trillion (USD 21 trillion) in 2022.  

As structural changes play out and access to, and appetite for, diversified investor portfolios increases, the investor landscape in China will continue to evolve.

Pension and asset management sector reforms and new Connect channels are linking domestic investors to international companies listed in Hong Kong;  and we expect much of the capital currently held in ‘banks and bricks’ to find its way into a broader range of assets and specifically capital markets - in turn expanding capital pools and creating new possibilities for Hong Kong. This is what we call the Big Bang of Finance.

The HKD/RMB Dual Counter Model

Pricing Hong Kong-listed stocks in RMB is another important facilitator – and an integral step towards connecting with this capital shift. The HKD/RMB Dual Counter Model allows listed companies to have both HKD and RMB counters for the same stock – and for investors to trade in local currency or offshore RMB.

We are already working with our partners on the next steps, including allowing trading of the RMB Counter through Southbound Stock Connect.

When Southbound Stock Connect opens for RMB trading, mainland investors will be able to instantly buy stocks that have an RMB counter - and this will include eligible international companies.

We believe the opportunity for Mainland investors to participate in Stock Connect without FX slippage could substantially increase Southbound flows.

And this, in turn, will draw more international issuers interested in transacting with this new pool of capital to Hong Kong's markets; it will support new infrastructure that will help offshore RMB liquidity to grow; and it will reinforce Hong Kong's position as the premier offshore RMB centre and support the RMB internationalisation process.

The time is now

No doubt, the opportunity for Hong Kong is immense. And the response we have seen to our Connect enhancements reflects this.

Take ETFs for example, since they were included in Stock Connect one year ago, average daily turnover of ETFs on the Northbound channel has grown from RMB 20 million in July 2022 to RMB 681 million in June 2023. On the Southbound channel, average daily turnover of ETFs has grown from HK$ 0.2 billion to HK$ 4.6 billion during the same period.

Thriving in the Big Bang of Finance

The Big Bang of Finance is happening.

The connectivity we are building is unrivalled – and that creates unlimited possibilities. So amongst the fragility, there are opportunities to be seized: it is time to connect China and the world and progress and promote our markets for the benefit of all.