Hong Kong budget: Inflows in doubt under RMB-denominated Stock Connect

For Chinese investors aiming to divest their onshore assets, Renminbi-denominated stocks in Hong Kong might not be a better option.
Hong Kong budget: Inflows in doubt under RMB-denominated Stock Connect

Hong Kong authorities have proposed allowing Renminbi-denominated stocks to trade via the city’s southbound Stock Connect platform, in a tactical decision to encourage more inflows from the Chinese mainland.

However, whether this will actually happen is still in doubt, as many mainland investors who buy Hong Kong equities tend to add offshore positions in Hong Kong dollars.


Hong Kong’s Financial Secretary Paul Chan Mo-po announced on February 23 in the city’s 2022-23 budget that Hong Kong regulators, namely the Securities and Futures Commission, Hong Kong Exchanges and Clearing, and Hong Kong Monetary Authority, have completed a feasibility study on allowing stocks on the southbound Stock Connect to be Renminbi-denominated.

The special administrative region government will start making preparations and discuss with mainland regulators on the arrangement, Chan said.

To encourage inflows, the government will roll out supporting measures, such as waiving the stamp duty on stock transfers to increase the liquidity of Renminbi‑denominated stocks. 

Alicia Garcia Herrero, 
Natixis CIB

At present, when Chinese mainland investors buy Hong Kong equities via Stock Connect, they need to exchange money into Hong Kong dollars in order to trade, which causes inconvenience and can be affected by exchange rate fluctuations.

“As Hong Kong’s stock market is in such a bear situation, there’s a reason to support the market, especially with the reported lockdown coming up during the fifth wave of Covid outbreak, posing difficulties to the initial public offerings and more,” said Alicia Garcia Herrero, Apac chief economist at Natixis Corporate & Investment Bank.

When the new Renminbi-denominated trading is available, Garcia Herrero believes more inflows from the mainland can be expected to support the market.  

However, Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence, doubts there will be large inflows made in Renminbi in the near term, as many mainland investors who buy Hong Kong stocks do so to divest their onshore investments.  

“I’m sceptical about how much inflow that may bring [in the short term],” Chiu said. “China wants to do this for sure, to help the usage of yuan and the long-run goal of internationalisation of yuan. That’s all very ideal.”

Stephen Chiu, 
Bloomberg Intelligence

But in reality, a major driver behind mainland investors’ purchases of H shares is the divestment of onshore assets. For these investors, despite the AH discount on some Chinese companies, the new measures offer the “same difference” and they may stick to Hong Kong dollar trading, Chiu said.  


In the latest budget, Financial Secretary Chan also said that in 2022, Hong Kong will continue to issue green bonds totalling about $4.5 billion.

Since 2018, Hong Kong has issued the equivalent of $7 billion-plus in green bonds targeting global institutional investors. Last year, the Shenzhen municipal government issued Renminbi green bonds in Hong Kong; it was the first city to do so, setting an example for Hong Kong-bond-based green financing in the Greater Bay Area. 

As both China and the European Union have released their own versions of sustainable finance taxonomy last year, Natixis NIB’s Garcia Herrero thinks that Hong Kong would be a good destination for mainland bond issuers aiming to raise green US dollars for industrial transition, to reconcile the difference in ESG standards.

For foreign investors, Hong Kong can be seen as a more “credible” green bond market, using a mixture of ESG standards extracted from both China’s and the EU’s taxonomies. “It can have a faster-growing green bond market than the mainland in this sense,” she said. 

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