Shenzhen Market to Connect to Hong Kong: Why Should Brokers Care?

The green light has been given for yet another stock connect which is designed to further open Chinese mainland markets.

Yesterday the Chinese securities regulator and the Hong Kong financial regulatory authorities announced that they are approving the deployment of a stock connect bridge between Shenzhen and Hong Kong. The creation of such a facility will further bolster the development of capital markets in Mainland China.

The move will fully connect all of the country’s stock exchanges – Hong Kong, Shanghai and Shenzhen. The China Securities Regulatory Commission (CSRC) and the Securities and Futures Commission (SFC) are making the move to unify the country’s three stock exchanges and provide more open access to capital markets in the country.

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The move follows up on the deployment of the first stock connect between Shanghai and Hong Kong in November 2014. The successful launch has paved the way for the second biggest mainland Chinese stock market to also get connected to Hong Kong.

The Chinese communist party is aiming to gradually make the yuan fully convertible by 2020

While shares of local brokerages have tanked in response to the news, this is very good news for providers of retail CFDs on stocks that are looking to expand their portfolio of products by including Chinese stocks. Liquidity conditions in mainland China are going to become better and brokers might want to start looking at more competitive offerings in terms of Chinese shares and indices.

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While currently a number of brokerages are already offering their services to clients who are keen to trade on the Chinese markets, an offering that blends retail FX and CFDs with access to the local stock market in China is likely to further boost the appeal of a truly multi-asset broker in the region.

Northbound and Southbound Trading Links

With the launch of the Shenzhen-Hong Kong Stock Connect, the mutual stock market access between the Mainland and Hong Kong will be comprised of four channels – the Northbound Shanghai Trading Link, the Southbound Hong Kong Trading Link under the Shanghai-Hong Kong Stock Connect and the Northbound Shenzhen Trading Link and the Southbound Hong Kong Trading Link under Shenzhen-Hong Kong Stock Connect.

The opening of the Mainland China market is likely to further diversify the exposure of foreign investors into China. The commitment of the Chinese government to continue expanding its market infrastructure is setting up a base for a big change in the structure of the market which should eventually trickle down to the Chinese yuan.

Fully Convertible Chinese Yuan by 2020 on the Cards

The five year plan of Chinese government previously committed to a fully convertible Chinese yuan by 2020. The Communist party has been keen to revise its currency policy, but before it gets there it has to make a number of reforms to its stocks and bonds markets.

After the inclusion of the Chinese yuan into the International Monetary Fund’s (IMF) Special Drawing Rights currency basket, the convertibility of the currency is likely to be on track. Chinese yuan trading is already taking a substantial part in the foreign exchange market according to data from ICAP, which announced late last year that the renminbi is the third most traded currency on the company’s EBS.

The Finance Magnates Intelligence Report for the second quarter of 2016 has more questions and answers about the Chinese market as the latest issue is wholly dedicated to the big trends in the country’s retail FX and CFDs trading market.

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