Giving overseas investors easier access to Shanghai-listed shares is not only important for the opening-up of the Chinese mainland, but a substantial step forward for internationalization of the yuan, otherwise known as the renminbi.
From Nov 17, the Shanghai-Hong Kong Stock Connect means Hong Kong investors can buy shares in 568 Shanghai-listed companies while mainland buyers can access 266 Hong Kong stocks. Initial restrictions set turnover limits of 13 billion yuan ($2.2 billion) on Hong Kong investors and 10.5 billion yuan on mainland investors.
Despite the obvious historical significance of the move, the ultimate benefits of the scheme probably lie in the internationalization of the yuan.
The yuan’s global status will undoubtedly be strengthened as overseas investors need to acquire offshore yuan before they can invest. According to data from SWIFT, a global transaction service, the yuan now ranks seventh in global payment currencies.
In anticipation of a surge in demand for yuan, the Hong Kong monetary authority has ditched long-standing conversion limits to help investors acquire yuan assets.
Hong Kong exchanges and clearing chief executive Charles Li Xiaojia called the trading link “a major breakthrough” in internationalization of the yuan and an important foundation for the process.
Internationalization of the yuan as a global investment currency will reinforce Hong Kong’s position as an international financial center and the premier offshore yuan hub, Hong Kong’s Chief Executive CY Leung said at the launch of the scheme.
Hong Kong’s offshore renminbi business has flourished since its launch in 2004, with the city holding the world’s largest pool of renminbi liquidity outside the mainland.
The link will propel the development of offshore renminbi business in Hong Kong to “new heights”, said Norman Chan, chief executive of Hong Kong Monetary Authority.
With the capital pool gradually taking shape and investment products diversifying, the offshore market in Hong Kong is a further step toward internationalization.
China is encouraging international use of the yuan by facilitating its use as a trade settlement currency, ensuring a stable exchange rate and encouraging offshore yuan markets.
Lin Caiyi, chief economist with Guotai Junan Securities, describes the stock connect as a channel for the yuan to flow from the mainland to Hong Kong, be invested in the offshore market and flow back, essential to internationalization.
Experiences accumulated from the scheme will be of great value, said Raymond So, dean of the School of Business at Hang Seng Management College and it is worth considering how these experiences can be transplanted if the scheme proves successful in Hong Kong.