Hong Kong outlines new liquidity reforms as US market rally pulls funds away

Hong Kong's securities regulator is proposing additional reforms to enhance market liquidity, as emerging markets face pressure from capital outflows due to a surge in US equities and a strengthening dollar. Julia Leung, CEO of the Securities and Futures Commission (SFC), discussed this at a conference organized by the Asian Securities & Financial Markets Association (Asifma) on Friday.

The proposed measures include extended trading hours, reduced settlement cycles, cross-market margining, and board lot reform, all aimed at boosting market efficiency and liquidity. Leung confirmed that the SFC is collaborating with the Hong Kong Exchanges and Clearing (HKEX) to implement margin offsets across its clearing houses, freeing up capital for more productive uses.

Additionally, the HKEX's clearing house, OTC Clear, will enable same-day settlement for bond deposits and withdrawals later this year, making non-cash collateral a more attractive funding option. The board lot reform will introduce eight standardized categories, with a maximum board lot value capped at HK$50,000 and a minimum reduced to HK$1,000.

These changes, set to take effect in November for existing issuers and since July for new listings, aim to lower entry barriers and broaden participation in stock trading. In the first half of 2024, Hong Kong's stock market saw average daily turnover exceed HK$270 billion, a 160% increase from 2023, driven by mainland Chinese funds flowing into Hong Kong through the Stock Connect and Bond Connect programs, particularly into technology shares.

However, global investors still favor US assets, with Nasdaq and the S&P 500 hitting record highs this week. The Hang Seng Index has declined around 5.5% this year. Leung also announced that the HKEX will soon announce a timeline for shortening the market's settlement cycle from T+2 to T+1, a practice adopted by the US in 2024 and planned for the European Union, UK, and Switzerland by October 2027.

While Asifma CEO Peter Stein welcomed the new measures, he expressed concerns about the implementation timeline due to Hong Kong's time difference with New York, which could complicate funding and foreign exchange conversions.