As brokers in Hong Kong and Shanghai prepare for the introduction in October of mutual trading of securities between their cities' bourses, the big mainland players stand to benefit more, posing a threat to smaller Hong Kong-based brokerages.
Under the so-called Shanghai-Hong Kong stock connect scheme, foreign investors will place buy or sell orders on Shanghai's A-share market through brokers located in Hong Kong, while Chinese who want to invest in Hong Kong's H-share market will be able to use brokers in the mainland.
Currently, foreigners only have very limited access to the A-share market under pilot programs that allocate quotas, such as QFII (Qualified Foreign Institutional Investor) and renminbi QFII as China is only gradually loosening controls over its capital account.
The new scheme will also involve quotas, but opens doors for retail investors.
The upcoming change provides a golden chance for mainland names that have long had a presence in Hong Kong without becoming big hitters there.
The rise of the mainland brokers, thanks to lower operating costs, more extensive research coverage, a full suite of capital market services and cheaper brokerage costs will result in a wave of consolidation among Hong Kong's mom and pop brokers, and lower-tier foreign investment banks.
"The through train scheme may lead to some industry consolidation among the smaller players in Hong Kong," said Chris Lai, an analyst at Bank of America Merrill Lynch in Hong Kong, referring to the stock connect scheme.
Only bigger brokers will be able to easily afford the investment needed to build trading systems for the stock scheme, and adapt to the different trading hours and settlement dates in Hong Kong and Shanghai.
By industry standards Hong Kong is a fragmented market with many small brokers, some of which operate out of single-room offices and employ only a few workers. More than 500 brokerages compete for business in the city's open market, with the top 14 accounting for more than half of turnover, data from the Hong Kong Stock Exchange showed.
