Hong Kong Looks to Start Trade in Yuan Stocks in Second Half

(Bloomberg) -- Hong Kong is ready to launch yuan-denominated stock trading to cater to investors in Shanghai and Shenzhen, with final clearances from regulators in mainland China expected in the second half of the year, according to people familiar with the matter.

The city’s own infrastructure is largely ready to accommodate trading of shares in the Chinese currency via the southbound Stock Connect link, but bourses in the mainland and clearing houses need more time for testing and final preparations, according to people familiar with the matter who asked not be named discussing confidential information. The process is being slowed by the pandemic situation and lockdown in Shanghai, the people said.

The move would give incoming Hong Kong leader John Lee, who was handpicked by Beijing to succeed Carrie Lam, potentially his first financial achievement after he’s installed in July. It would reduce currency risks for investors in the mainland, while also, in a limited way, dovetail with Beijing’s ambitions to boost the use of the yuan offshore.  

Hong Kong has been seeking to build itself as a hub for offshore yuan trading by introducing more products denominated in the Chinese currency. A government-led working group has completed a feasibility study, and is prepared to waive stamp duty for market makers in yuan-denominated southbound stock trading once it starts, Christopher Hui, secretary for the Financial Services and Treasury Bureau, told lawmakers earlier this month. 

In response to questions from Bloomberg News, a spokesman for the bureau, said discussions are ongoing with regulatory authorities and relevant organizations in mainland China, “with a view to seeking early implementation of the initiative.” 

The China Securities Regulatory Commission didn’t immediately reply to a request for a comment. 

However, the past endeavor to introduce a system known as “dual tranche, dual counter” to allow yuan-denominated shares met with limited success. The only company to adopt the structure since the inception ten years ago, Shenzhen Investment Holdings, saw most of its trading in the freely convertible Hong Kong dollar despite having a yuan option. 

Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets, said the channel will likely have little impact on “yuan internationalization” since buyers of yuan stocks will be China-based firms. Market demand for such a channel is still in doubt, especially with firms now divesting from China following the shocks from regulatory crackdown and the drive “common prosperity,” Lai said. 

Chinese markets are reeling from a regulatory crackdown by President Xi Jinping targeting a broad section of the private sector, including the nation’s biggest technology companies. At the same time, his signature issue of creating “common prosperity” has further unnerved investors as economic growth slows in the world’s second-largest economy.  

Mainland investors net bought HK$1.58 billion ($202 million) of Hong Kong-listed stocks daily on average since this year via Stock Connect, a 73% drop from the year earlier, according to data compiled by Bloomberg. The link provides a channel for two-way flows between Hong Kong and the mainland with the capital kept in a closed-loop system to accommodate Chinese capital controls. The northbound link, used by foreign investors into Chinese markets, has seen net selling of 356.6 million yuan ($54.4 million) on average everyday this year.

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