Growing interest in A shares bringing more benefits for Hong Kong

Foreign investors' growing interest in the Chinese mainland's A shares and improving market connectivity with the mainland will further enhance Hong Kong Special Administrative Region's status as a key international financial hub, market experts said on Thursday.

Even though the A-share market has been an underperformer among global equities this year, international investor interest in the market has been on the rise. Net inflow to A shares via northbound trading of the stock connect link between the mainland and Hong Kong bourses is on track to reach a record level for the year, they said.

A net total of 347.79 billion yuan ($54.46 billion) flowed into A shares via northbound trading of the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect from the beginning of the year to Thursday, closing in on the annual record of 351.7 billion yuan set in 2019, with trading in the month of December still to come, said market tracker Wind Info.

Cheng Shi, chief economist at Hong Kong-based ICBC International, said the robust inflows demonstrated how the growing appeal of A shares for global investors will benefit Hong Kong, especially as the stock connects are now the most popular channel for foreign investors taking positions in A shares.

"Deepening connectivity with the mainland has presented new development opportunities to Hong Kong," Cheng said. "The SAR's status as an international financial center is expected to further rise amid the country's high-quality economic development, deepening efforts of high-level opening-up and the growing heft of the renminbi in the global financial system."

There have been various mechanisms of deepening capital market connectivity between the mainland and Hong Kong in recent years, ranging from the stock and bond connect programs to the wealth management connect pilot scheme for the Guangdong-Hong Kong-Macao Greater Bay Area launched in October.

Also, the MSCI China A 50 Connect Index Futures, the first A-share derivatives contract offered by Hong Kong Exchanges and Clearing Ltd, began trading in October, reinforcing Hong Kong's role as a key gateway for global investors entering mainland's capital markets.

More progress can be expected in the coming years, as the 14th Five-Year Plan (2021-25)-the country's development blueprint for the period-declared support for Hong Kong to lift its status as an international financial hub. This would require more efforts to deepen financial market connectivity between the mainland and Hong Kong.

"There is great potential for mainland and Hong Kong markets to further connect with each other," Cheng said, citing room for optimizing existing connect programs and exploring new mechanisms when it comes to bond issuance by mainland's local governments in Hong Kong and setting up a regional carbon trading center.

Cheng said the free-float A-share market capitalization held by foreign investors through the stock connects exceeded 2.6 trillion yuan as of Wednesday, accounting for 3.63 percent of the whole market.

"There remains room for foreign money to further allocate in A shares via the stock connects, given the steady earnings improvements of listed firms and relatively low valuations compared with overseas equities like the US markets," he said.

The annual net inflow into A shares via northbound trading of the stock connects is expected to reach 400 billion yuan or so in 2022, up from about 350 billion yuan this year, with increasing foreign interest in small and innovative listed firms, a CITIC Securities report said.