Shanghai-Hong Kong Stock Connect provides international investors direct access to China’s domestic A shares market for the first time. However, it is hampered by a number of idiosyncratic features.

The Stock Connect scheme, however, presents a number of restrictions and operational challenges that constrain trading strategies, create operational complexity, and introduce risk. These include:

• Hybrid settlement cycle.
• No day trading and limited support for short selling.
• A requirement to settle in RMB.
• Asset fungibility issues.
• Shareholder risk and reporting.

Shanghai-Hong Kong Stock Connect, launched in November 2014, is a mutual market access service between the Hong Kong and Shanghai stock exchanges. From the first proposal a decade ago, such a trading link has been eagerly awaited by international investors seeking direct access to China’s equities market.

“The Stock Connect program is only the first step in a gradual opening of China’s capital markets to international trading,” says Neil Katkov, senior vice president of Celent’s Asian Financial Services practice and author of the report. “Increased trading quotas, extension to other asset classes and venues in China, harmonization of trading rules with global practice, and, ultimately, enablement of low-latency advanced trading strategies are sure to follow.”

This report provides an overview of Shanghai-Hong Kong Stock Connect, examines the operational challenges of its unique trading model, and estimates the potential of Stock Connect-like mutual market access initiatives.