If the Shanghai-Hong Kong Stock Connect is to be successful in the long term, it will have to remove the many barriers to participation, according to a whitepaper by Celent, commissioned by the Depository Trust & Clearing Corporation (DTCC).

Institutional investors continue to cite issues such as limited support for short selling, using Renminbi (RMB) as the sole settlement currency and the hybrid (T+0/T+1) settlement cycle as obstacles to increased usage of Stock Connect. Uncertainty over asset fungibility, shareholder rights and reporting compound the problems.

However, regulators and the Hong Kong and Shanghai stock exchanges are working to resolve complex issues as well as to address a unique requirement to pre-deliver shares for all sell orders. 

This should enable greater participation; pave the way to more A share representation in global equity benchmark indices such as MSCI and FTSE Russell, which will in turn unleash substantial further investment in A shares longer term; and ultimately open up this significant market to more trading strategies and investors globally, says Celent.

“We estimate these workarounds will drive international holdings of A shares to $428bn by 2017. Because they are committed to opening China’s capital account, regulators can be expected to expand quotas to meet investor demand,” said Dr Neil Katkov, senior vice president in Celent’s global Asian financial services group.

Despite problems, the China Securities Regulatory Commission (CSRC) and Securities and Futures Commission (SFC) supported initiative has already achieved a great deal in the gradual opening up of China’s capital markets.

“The success of the Stock Connect, despite the challenges, is inspiring a wave of cross-border exchange initiatives involving China, Asia and beyond. Already, a Shenzhen-Hong Kong Stock Connect is slated to start later this year," said Katkov.

"Observers debate the extent to which this will be followed by links between Shanghai or Shenzhen and Taiwan, Singapore, Tokyo, New York and London. SHSC has also inspired a number of proposals for links between Asian markets outside of China.”

Last month, Shanghai Stock Exchange, China Financial Futures Exchange and Deutsche Börse AG agreed on a strategic cooperation to launch a joint venture. It has the objective to develop and to market financial instruments based on Chinese underlyings to international investors outside mainland China, therefore, products will be offered in RMB.

“What’s driving demand for the Shanghai Hong Kong Stock Connect is the fact that it opens up a market previously difficult to access," said Matthew Chan, head of strategy at DTCC’s subsidiary Omgeo. "We look forward to today’s challenges being resolved, and to Shanghai Hong Kong Stock Connect achieving its potential."