Why Stock Connect should remove its daily quota soon
With expected increase in volumes and a stable renminbi, there is no need for the quota anymore
3 Jan 2018 | Bayani S Cruz
The Stock Connect share trading link between the stock exchanges of Hong Kong, Shanghai, and Shenzhen enjoyed a relatively successful year in 2017 after regulators addressed the key issue that had plagued the scheme.
Investors, fund managers and service providers who use the link agree that the implementation of real-time delivery versus payments (DVP) on November 20 2017, effectively addressed counterparty risks and removed the last stumbling block for overseas investors to enter the market. (Stock-connect-addresses-counterparty-risk-with-real-time-payments)
But in the light of the expected inclusion of 222 A-shares into the MSCI Emerging Markets Index in June 2018, there is one more issue that has to be resolved. This is the removal of the daily quota.
At present, the Stock Connect is has a daily quota of 13.0 billion renminbi for Northbound trading and 10.5 billion renminbi Southbound trading.
This daily quota remains despite the removal of the aggregate quota (maximum cross-boundary investment quota) last December 2016. The Northbound Aggregate Quota is set at 300 billion renminbi while the Southbound Aggregate Quota is set at 250 billion renminbi.
According to Cindy Chen, country head, Hong Kong Securities Services of Citi, with the prospective inclusion of A-shares into the MSCI, trading volumes on the Stock Connect are expected to increase sharply in the next few months and is expected to reach and may even surpass the volumes set by the quota.
“If you look at what the market estimates in terms of net inflow that may result from the five percent MSCI inclusion, it’s anywhere from US$10-17 billion. In theory, if everyone happened to rebalance at the same time you could potentially use up the quota. The market doesn’t like this uncertainty,” Chen says.
Chen cites the Bond Connect, another China-Hong Kong scheme launched in July 2017 that allows bond investors to trade in each other’s markets, which has no quota.
“We would like to see some relaxation of the quota like doubling it during the rebalancing day or maybe if there’s no need for it to completely remove it,” Chen says.
The quotas for the Stock Connect was originally intended as a control mechanism by authorities who wanted to ensure they have some way of restricting the outflow of local currency from the Chinese market. This concern was particularly relevant when the Stock Connect was launched in November 2014. At that time the renminbi was appreciating against other currencies.
“But that’s no longer an issue. The renminbi is not just one way anymore, it’s two-way. It could go up and it could go down. Maybe the daily quota is no longer needed at this point given that the Connect model has been proven to be successful,” Chen says.