Yes, but not as much if it were to allow the trading of exchange traded funds. The recent opening of the Shanghai direct stock connect has had many effects — a primary one being that now retail investors in the mainland and Hong Kong are able to buy stocks from each other’s markets. This point about retail is key. Past programs such as the Qualified Foreign Institutional Investor program have allowed institutional investors from outside China to invest in Chinese stocks in controlled amounts. So it’s no surprise to see in the WSJ article that there has been little increase in institutional demand as a result of the stock connect. The real change that we see in the Shanghai stock connect is that there is now a more liberalized attitude towards retail investors in China owning foreign stocks.
Chinese retail investors benefit the most because the addition of Hong Kong stocks to their stock portfolio allows for a dramatic increase in diversification. In effect, retail investors have now gone from a one country world to a two country world. On the other hand, Hong Kong investors could have already invested abroad, so their welfare gains are smaller. And given how much people invest in houses in China, it’s clear that households are looking for other investment outlets through which to channel their savings. Hong Kong stocks can now be one of those channels.
Even if it seems complicated for retail investors to go invest in Hong Kong, now that the connect is open Chinese mutual funds will soon have the ability to go invest in Hong Kong for their clients. In doing so they can build up a diversified basket of constituent stocks in the Hong Kong indices and sell those mutual fund shares to clients.
However, retail investors would be able to circumvent this if only they were allowed to trade exchange traded funds on the Hong Kong stock exchange. This way the retail investors would be able to directly buy diversified holdings of Hong Kong stocks, thus allowing them to capture the diversification benefits of overseas holdings without the costs of using a highly technical stock connect.
Another future benefit of trading exchange traded funds is that it lays the groundwork for Chinese investors to invest in global equities. Imagine a firm like Vanguard offering a cheap ETF on the Hong Kong market that was a Hong Kong dollar denominated fund that bought the SP500 market ETF and some diversified basket of other developed market funds. Then this would fully unleash the ability of Chinese retail investors to diversify internationally and therefore better save for retirement.