(Yicai Global) March 30 -- With the launch of the Shenzhen-Hong Kong Stock Connect at the end of 2016, more and more mainland investors are investing in the Hong Kong Stock Exchange via this new initiative. There is significant increase in the southward flowing funds under the connected Shanghai, Shenzhen and Hong Kong stock markets.
The Hong Kong Stock Exchange has responded to latest market concerns regarding "how the connected Hong Kong stock program would affect cross-border capital flows."
Cnstock.com quoted the Hong Kong Stock Exchange as saying yesterday that mainland investors have to pay Chinese yuan to buy Hong Kong stocks through the Shanghai- and Shenzhen-Hong Kong Stock Connect. The payment will be settled in mainland China and then transferred to Hong Kong in Chinese yuan. The money will then be converted to Hong Kong dollars in HK before finally being delivered to Hong Kong for settlement. When mainland investors sell HK stocks, the funds will also "come back the same way" as Chinese yuan in a similar manner. Money cashed out from the connected HK stocks can only return via the local clearing system without remaining in the Hong Kong market as other forms of assets. This can effectively guard against money laundering and control the risks of unrestricted flow of hot money.
Moreover, Hong Kong is a free market for diversified investors. A large number of professional institutional investors and retail investors participate in the game with all kinds of short-selling tools. The market adopts auto-matching for both buying and selling. Therefore, creating false market by manipulating trading or other similar tricks is no easy task, which faces huge market risks and high transaction costs every minute.
Finally, both mainland and HK regulators have continued strengthening law enforcement cooperation to crack down on all kinds of cross-border security trading violations since the launch of the Shanghai-Hong Kong Stock Connect. All connected trading is conducted by the relevant exchanges and clearing companies. Therefore, data of the traders, products, opening and closing prices are all clearly recorded and the market can be effectively monitored.