Shenzhen-HK Stock Connect ETA Q4 ’15, Despite Record Low Volumes

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  • Post last modified:November 6, 2015

Equities in Shenzhen and Hong Kong advanced in early trade this week on reports that the People’s Bank of China (PBOC) planned to open up another stock connect program for investors and managers seeking international exposure.

Given the recent extreme volatility in Asia-Pac markets, traders seemed to be expecting this program to be delayed…perhaps to sometime in 2016. With new confirmation from China’s monetary authority however, the 2015 ETA is back on the table. Sources at the South China Morning Post went on to further indicate that the PBOC’s governor, Zhou Xiaochuan, penned the article confirming the program’s goals and timing. With the former in mind, it is important to note that neither counterparties have approved any regulatory efforts, but official talks have been held.
Exchange operators and brokerage firms rallied more than 5%, while the Hang Seng Index rallied just over 2% on the news.

Trading volume via the existing Shanghai-Hong Kong Stock Connect has dropped significantly however. Bloomberg has reported that northbound and southbound flows between Shanghai and HK are down an average of 41%, or a 7 month low.

Relying on these new liquidity venues is absolutely a risk to investors, managers, and traders. Without appropriate volume, a significant amount of edge can be given away when attempting operate. These conditions favor alternative liquidity solutions (stock loans).

This story also underscores recent policy changes that have been opening up China’s markets to foreign investors and institutions. Via local brokers, new capital will be put to work. While new long-term efforts are certainly welcomed by policy makers, history has showed market participants that China can act swiftly when faced with volatility and adverse market moves, another risk to investors.

Low trading volume combined with an uncertain regulatory environment is a risky proposition to those with a fiduciary responsibility to their clients. Given these two risk factors, it is essential to explore alternative liquidity solutions, more specifically stock based lending.

Stock backed loans, or cash-for-stock transactions, can be a quick and low interest source of essential liquidity when trading venues are constrained or when investors require upside potential plus a cash injection. Squadron Lending provides these custom solutions to clients around the world…with a variety of durations and deal sizes. Securities lending is an ideal liquidity solution for clients who are keen on keeping their investment appreciation potential.

Volatility can manifest itself from a lack of understanding and low volume swings. These two risk factors are currently present as previously explored. However, these are the exact times when opportunity is at its highest potential. Share lending programs, like the services that Squadron Lending provides, can be an essential source of capital when other markets are constrained, shut down, or when short term liabilities come due.

Participants within the international capital markets are encouraged to visit squadronlending.com to see how our share lending services could benefit you or your client.