China stock connect scheme scorecard throws up surprises

Sun Dec 21, 2014 4:13pm EST
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By Saikat Chatterjee

HONG KONG (Reuters) - A month after China opened up its equity markets in a landmark trading link with Hong Kong, demand has been subdued and the bulk of activity has come from short-term speculative investors.

The authorities had hoped mutual and pension funds and private banks would form the bedrock of the Shanghai-Hong Kong stock connect. But early trade volumes in the program launched in mid-November were completely dominated by hedge funds and banks' proprietary trading desks, according to five traders at some of the biggest brokerages participating in the scheme.

Regulatory hurdles have kept out a large swathe of the investment community - and the steady business the financial industry and regulators had hoped they would bring - despite a sizzling stock market rally on the mainland.

Market players say it could take months for long-term investors to eventually trickle into the program, as they devise ways to cope with its peculiarities.

"We are not participating in the scheme yet because of the operational issues that have yet to be resolved and we prefer to access the mainland markets via exchange traded funds," Robert Cormie, Asia CEO of BMO Private Bank, told Reuters.

Edmund Yun, executive director of investment at the same wealth management firm, agreed, citing a number of prohibitive issues. These include beneficial ownership, tax and trading settlement.

Hedge funds use banks' prime brokerages, which help them more deftly manage those regulatory constraints. Stock portfolios of hedge funds are often held by the prime brokers themselves to facilitate quick trading decisions so they are unaffected by ownership constraints.

For example, under the scheme, funds wanting to sell holdings of Shanghai-listed shares have to deliver the shares to brokers a day before they are to be sold, a peculiarity that exists in no other major stock market.   Continued...

Yuan banknotes are counted at a currency exchange store in Hong Kong January 11, 2007.  REUTERS/Bobby Yip