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2023.05.23 02:54
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Preview | Countdown to RMB Directly Buying Hong Kong Stocks! Why is it worth paying attention to?

Hong Kong stocks are expected to receive incremental offshore RMB allocation funds, and are expected to benefit from both the USD and RMB financing environment in the long term, reducing the financing costs of listed companies and investors. If the RMB trading counter is connected to the Hong Kong Stock Connect in the future, it will help Hong Kong Stock Connect investors reduce the risk of intraday exchange rate fluctuations.

On May 19, 2023, the Hong Kong Stock Exchange announced that it plans to launch the "HKD-CNY Dual Counter Model" and the Dual Counter Party Mechanism in the Hong Kong securities market when the market is ready on June 19, 2023.

According to the announcement, under the dual counter model, investors can exchange HKD counter securities and CNY counter securities issued by the same issuer. The securities under the two counters belong to the same category of securities, so the securities under the two counters can be converted into each other without changing the ownership of the benefits.

The Hong Kong Stock Exchange has issued relevant rule revisions for the introduction of the dual counter model and the dual counter party mechanism. The dual counter party will provide bid and ask prices for the RMB-denominated stocks of these securities, thereby providing liquidity for the RMB counter and narrowing the price difference between the two counters. The list of the first batch of dual counter securities and market makers will be announced in due course.

Shenwan Hongyuan believes that this new system will make the Hong Kong stock market an important part of the asset side of RMB internationalization, which will help to increase the willingness of overseas institutions and individuals to hold RMB.

Hong Kong stocks are expected to receive incremental offshore RMB allocation funds, and in the long run, they are expected to benefit from both the US dollar and RMB financing environment, reducing the financing costs of listed companies and investors. If the RMB trading counter is connected to the Hong Kong Stock Connect in the future, it will help Hong Kong Stock Connect investors reduce the risk of intraday exchange rate fluctuations.

Hong Kong stocks RMB trading is an important part of the asset side of RMB internationalization

There are currently few investment products available to RMB holders in the offshore market, including dim sum bonds, bank deposits, and QFII/RQFII funds.

The RMB trading of Hong Kong stocks can provide such investors with a direct channel to reach high-quality listed companies in China in familiar financial markets abroad. Currently, 24 companies have applied to add RMB trading counters, of which 20 are Hang Seng Index component stocks that are more familiar to overseas investors, which will help enhance the attractiveness and liquidity of RMB counter securities in the initial stage.

Hong Kong stocks are expected to receive incremental offshore RMB allocation funds and are expected to benefit from both the US dollar and RMB financing environment in the long run

As the RMB counter is not connected to the Hong Kong Stock Connect in the initial stage, it will first attract offshore RMB funds. We believe that this type of fund may be a new incremental fund for Hong Kong stocks. As RMB can be freely exchanged for HKD in the offshore market, there is no mechanism barrier for offshore RMB holders who already have the intention to invest in Hong Kong stocks and do not need to consider different currency exposures to exchange offshore RMB for HKD and then buy Hong Kong stocks.

In this context, investors who continue to hold offshore RMB, such as large financial institutions and sovereign wealth funds, should aim to retain some RMB-denominated exposure. Under the RMB trading counter system, they can directly buy Hong Kong stocks denominated in RMB with offshore RMB, thereby achieving the goal of retaining RMB-denominated assets. And because the assets of the listed companies included in this plan are mostly denominated in RMB, investors can better manage their exchange rate risk. On the other hand, against the backdrop of asynchronous economic and monetary policy cycles between China and the United States, the RMB trading counter in the Hong Kong stock market is expected to enable the market to benefit from both the financing environment of the US dollar and the RMB, thereby minimizing the financing costs of listed companies and investors.

Key points in the first stage: Trading activity of RMB counter and price difference between HKD stocks

In order to enhance the liquidity of the RMB counter and minimize the price difference between the RMB and HKD counters, HKEX has set up a dual counter market maker mechanism. On the one hand, market makers can provide continuous quotes and respond to quotes on the RMB counter to facilitate investors to buy and sell at the desired price; on the other hand, market makers can also conduct arbitrage transactions of the same stock between the two counters, making the prices of dual currency stocks tend to be consistent in the long term.

The Hong Kong government will also exempt market makers from stamp duty during the above trading process to encourage exchange participants to become dual currency counter market makers and increase the trading activity of the RMB counter. Under this system, the liquidity of RMB counter stocks is expected to be better than that of RMB-denominated stocks at present.

On the other hand, since RMB stocks and HKD stocks can be freely converted (similar to the free conversion between dual-listed stocks in Hong Kong and the United States), the price difference can theoretically be eliminated by arbitrage trading, and the actual price difference in trading reflects more the liquidity difference between the two counters.

Outlook for the next stage: Timeframe for inclusion in the Hong Kong Stock Connect and reduction of intraday exchange rate risk for Hong Kong Stock Connect investors

Although the exchange of currencies in the Hong Kong Stock Connect trading is completed by the exchange and settlement companies and is almost "imperceptible" to investors, a reserve of about 3% of the exchange rate needs to be collected in advance during the trading process because the actual exchange rate needs to be determined after the market closes. Investors also need to bear the risk of the difference between the reference exchange rate (the exchange rate of the previous natural day before T day) and the actual settlement exchange rate (the exchange rate after the market closes on T day).

If the RMB counter can be included in the next stage of the Hong Kong Stock Connect, mainland investors can lock in the exchange rate cost in real time according to the RMB quotation, reducing the additional trading costs caused by intraday exchange rate fluctuations. However, since there is no conversion mechanism between RMB counter stocks and A-shares, the direct impact of the dual counter system on the AH price difference may be relatively limited.

In addition, considering that the liquidity of RMB counter stocks may be lower than that of HKD counter stocks in the initial stage, HKD counter stocks with relatively better liquidity are still an important channel for Hong Kong Stock Connect investors to participate in the Hong Kong stock market.