Hong Kong prepares for new era of yuan stock trading with ‘dual counter’ tickers

The city’s stock exchange hopes the addition of Chinese yuan trading for an initial 24 companies will draw in new investors who prefer to use the mainland currency

Key Takeaways:

• 24 Hong Kong-listed stocks have been approved for trading using mainland China’s yuan for their Hong Kong dollar-denominated listings starting June 19
• Hong Kong is providing strong support for the scheme, but the biggest boost could come if mainland investors can use it through the Hong Kong-China Stock Connect program

By Edith Terry

Investor expectations soared in 2002 when China opened its domestic stock markets to foreign investors through its Qualified Foreign Institutional Investor (QFII) program, and then four years later when it allowed mainland Chinese companies to buy Hong Kong-listed shares through its Qualified Domestic Institutional Investors (QDII) program. Both steps were seen as relaxations of China’s strict controls of interplay between its domestic currency, the yuan, and foreign currencies.

Nearly two decades later, China’s capital account still remains largely walled off from the rest of the world despite the launch of a series of similar programs offering investors narrow channels linking China’s debt and equity markets with the outside world. Most of those are in Hong Kong, which China often uses as a test bed for such new programs.

The latest of those test programs, called the “dual counter” program, will open the door a tiny bit wider when it allows investors to use offshore yuan to invest in some Hong Kong-listed companies starting on June 19. Twenty-four stocks have been approved for such dual counters, from internet giant Tencent Holdings (0700.HK), which announced last week it had been accepted to the program, to carmaker Great Wall Motor Co. (2333.HK; 601633.SS).

The 24 stocks at the program’s launch include some of the Hong Kong Stock Exchange’s biggest mainland China-based companies, with a total market value of HK$12.31 trillion ($1.57 trillion), representing more than a third of the exchange’s total as of June 12. Hong Kong Finance Secretary Paul Chan, who has been talking up dual counters for more than a year, has said offering a trading alternative in yuan will counteract the damage from the “U.S. banking industry’s turmoil, [U.S.] government debt problems, and huge deficits [being] monetized.”

China has been trying to promote the yuan as an alternative to the U.S. dollar for global trade and finance in recent years, and Chan’s comments reflect the frustration some countries feel at the Fed’s use of America’s currency to benefit the domestic U.S. economy despite the dollar’s global status. But China’s currency has its own drawbacks, most notably its lack of convertibility and the difficulty of moving it between China and the rest of the world.    

Whether the new dual counters will work some magic to boost sentiment and trading of the new dual currency tickers remains to be seen, as the broader Hong Kong stock market remains stuck in the doldrums following a brief rally at the start of the year. 

The idea of dual-currency trading products in Hong Kong isn’t completely new. The Hong Kong Stock Exchange introduced its first dual-counter security, the Harvest MSCI China A Index Exchange Traded Fund (3118.HK), in 2012 with the same kind of fanfare and enthusiasm we’re seeing with the new program.

“A major benefit of a (dual currency) security for investors is the convenience of being able to trade in one of the two currencies, while the benefits for issuers include a wider base of potential investors,” the Hong Kong exchange said in a press release at the time of the 2012 launch. But more than a decade later, the fund trades at an average daily volume of just 5,014 shares in a price range of HK$14.50 to HK$18.80, compared with its starting price of HK$9.06 per share in November 2012.

Lack of incentives

Critics blame the earlier program’s lackluster performance on its lack of incentives, and the low liquidity of the yuan portion of its tickers. This time around, Hong Kong is relatively flush with yuan, with 833 billion yuan ($116 billion) in deposits in the city at the end of April, according to the Hong Kong Monetary Authority. That’s up substantially from the 603 billion yuan in yuan deposits in December 2012 when the first dual currency program began.

In fact, the latest yuan deposit figure is down from a high of nearly 1.1 trillion yuan in January 2022 due to outflows to take advantage of rising U.S. interesting rates, and pressure on China’s offshore bonds due to the war in Ukraine. But the yuan pool available for potential investment in the new dual counter tickers is still substantial.

To encourage trading in such tickers, the Hong Kong government has exempted them from its usual stamp duty of 0.13% of each transaction value, which is the biggest transactional cost for traders. Several other incentives also exist to encourage trading in the dual counter tickers.

But the biggest boost could come if Beijing allows investors based on the Chinese mainland to take advantage of the new yuan tickers via an existing popular program allowing them to buy Hong Kong stocks. Mainland investors can already buy a large number of Hong Kong-listed stocks under the Hong Kong-Shanghai and Hong Kong-Shenzhen connect programs, but they currently can only do so using Hong Kong dollars that may not be easily available to many.

China’s longer-term goal in its many Hong Kong-based pilot programs could be one day making the yuan fully convertible with foreign currencies. Such a development could even come quickly and unexpectedly, similar to a major opening for the currency in 1996 when exports were suffering due to the yuan’s high valuation. But such a day is more likely far in the future, and even Hong Kong’s Chan has acknowledged that the “dual counter model will increase in stages.”

Meanwhile, excitement around the new dual counter trading system’s debut next week appears to be limited, at least based on the lack of any big uptick in recent trading volume and prices for the first 24 stocks in the program.

Tencent’s trading volume totaled 13.5 million shares on June 12, below its recent average. And its shares didn’t move much after announcing its inclusion in the dual ticker program, gaining just 2% over the next four trading days. Great Wall Motor’s trading volume of 13.2 million shares on June 12 was also about a third of its usual average. Its stock did slightly better, rising 4.5% in the five days after an announcement of its inclusion in the program last week.

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