Thu, 06/22/2023 - 13:26
Much like in the rest of the world, the Asian stock market has had quite a bumpy ride in recent months. After reaching dizzying heights during the pandemic, both the Hang Seng and SSE Composite Index were in freefall until practically the end of 2022. As in the US and Europe, Chinese equities' fortunes began to improve at the beginning of this year, and both of the aforementioned indices are now up 25% and 15%, respectively, from local lows.
But this is by no means the most interesting news to come out of the East of late. That's right. This Monday saw the launch of the much-anticipated HKD-RMB Dual Counter Model, which will see an initial 24 companies start offering yuan counters that will allow investors in Hong Kong to trade the company's stock in both RMB and HKD.
The initial list of early adopters of the new dual counter model includes tech giants like Tencent, Alibaba, and Baidu. This is particularly interesting in light of the years-long tech crackdown on China's tech sector. It seemed like the Chinese Communist Party had set its sights on curtailing the power of these companies, but now all that appears to have changed. Traders and investors will certainly be wondering what this means for Chinese stocks, as well as the yuan and Hong Kong dollar. And while there are no sure things when it comes to the markets, we'll do our best to lay out the landscape.
Why now?
Perhaps the biggest question on people's minds is what is behind the Hong Kong Exchanges and Clearing's decision to offer stock trading in both RMB and HKD. After all, it's not the first time this has been attempted. Many will remember 2012's fated "dual tranche, dual counter" initiative, which failed when only one company adopted it. On top of that, Mainland investors are already able to purchase Hong Kong-listed stocks via the Southbound Stock Connect market access programme.
However, this is a rather inconvenient method of investing for many citizens of Mainland China, and HKEX CEO Nicolas Aguzin is convinced that the interest in the new dual counter model will be overwhelming as more and more companies sign up for the new system over the coming months and years. As he puts it: "The fact that they [Mainland investors] will be able to transact on an instant basis in renminbi […] is a huge difference." It might well take some time until stocks can be purchased seamlessly in RMB, but the HKEX is working closely with regulators and other stakeholders to ensure everything is in place before making a proper announcement.
What might it mean for Hong Kong-listed stocks?
Anybody with even a passing interest in Asian markets will surely remember the 2020-2021 crackdown from both US and Chinese authorities. Washington famously put an end to shady ADRs with the Holding Foreign Companies Accountable Act, which allowed the US Securities and Exchange Commission to delist Chinese companies from American exchanges if domestic regulators were not able to review company audits for three consecutive years.
Meanwhile, Beijing sought to rein in the country's overly powerful tech companies in a campaign that was most remembered for Jack Ma's temporary disappearance and the blocking of the $315 billion Ant Pay IPO. Now that the Chinese tech sector is cowed and unrest in Hong Kong has largely been put to bed, the Chinese Communist Party feels confident in realising its plan to centralise trading of China's stocks within its own sphere of influence. All of this points to a potential resurgence for big names like Tencent, Alibaba and Baidu, but also lesser players like Netease, Nio, and SMIC.
Indeed, the 24 names that have already applied for the dual counter system account for 40% of the average daily turnover of the cash equities market. And with another 1.6 billion potential investors on the Mainland now in reach, the sky truly is the limit.
Don't forget about Forex
As we've already touched upon above, trading volumes are expected to increase exponentially, with the influx of capital from the Chinese Mainland into the Hong Kong exchange anticipated once direct access is available. It can be easy to forget, but wherever securities are traded, so is cash. One of the biggest drawbacks of the RMB in the past has been its command economy context and limited trading potential. The yuan is already up 5% on the US dollar and is expected to continue to move upward for the foreseeable future. This is particularly impressive given the strong dollar we've seen of late amid hawkish Fed policy and strong US Treasury yields.
As of 22 June 2023, the RMB stands at 7.18 against the US dollar. The increased trading volumes associated with this opening up of markets, coupled with Beijing's shift towards trading traditional dollar assets in its own currency, is likely to lead to further strengthening for the renminbi. Add to this the US Federal Reserve's compulsion to pause its monetary tightening and perhaps even transition towards a more dovish policy amid increased economic uncertainty, and we could well see the yuan up towards the key psychological level of 8.00 by year's end.
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