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Shanghai-Hong Kong Stock Connect: An Unprecedented Challenge, An Unprecedented Opportunity

Buying Renmimbi to pay for the SSE stocks also involves more than meets the eye. Northbound investors have to pay for their purchases or get paid for stock sales in offshore RMB, or CNH. CNH are RMB balances that have accumulated offshore over time as a result of trade. Although CNH and onshore RMB, or CNY, are both Renmimbi, CNH cannot be used for onshore transactions on the mainland and vice versa. As a result, the exchange rates of CNH and CNY often do differ slightly, and they also have different yield curves. This quirk means that the effective prices in terms of Northbound investors’ home currencies may differ from those based on the onshore exchange rate. Investor education on this point will be advisable and both brokers and customers will want to keep an eye on CNH liquidity as they plan their Northbound buying strategies.
The Shanghai-Hong Kong Stock Connect is a bold project, unique in a number of ways. Its structure and function features a number of quirks that over the long term will likely be mere blips in a historic initiative. The Hong Kong Exchange is working overtime to ensure success, engaging vigorously with the industry to educate brokers and clients and to address concerns. The Shanghai Stock Exchange, the world’s fifth largest exchange by turnover in the first half of 2014, is similarly engaged while adjusting its mindset to the novel prospect of a global customer base. Regulators in Hong Kong and Beijing are forging a closer relationship to make the scheme work. Stock Connect is a pilot, but the odds are high that it will evolve into a thriving two-way channel of investment into and out of China. Bringing stocks of the world’s second largest economy, largest by some measures, to investors around the world for the first time is bound to have a transformative effect on the global equity landscape for all players.

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