China | Capital Markets
In a major step toward opening China’s capital account, Hong Kong and Shanghai have linked their equity markets and abolished the cap on how much Chinese currency Hong Kong residents may purchase (or sell) daily.
“Removing the currency exchange limit is a necessary step to push forward the development of Hong Kong’s offshore renminbi market,” says Nathan Chow, economist at DBS Bank. But he notes that while “the bourse link promotes two-way capital flows, valuation-driven equity flows can, at times, be significantly imbalanced.”
The Stock Connect program (as the market link is called) could tighten offshore money market conditions, since Hong Kong investors must use renminbi to pay for their stock purchases on the Shanghai exchange. Given Hong Kong’s limited renminbi deposit pool, its renminbi market is vulnerable to a liquidity squeeze, Chow says. Thus, the conversion limit was scrapped to alleviate cash squeezes and deepen the offshore renminbi market.
