Cross-border Flows Of Shanghai-Hong Kong Stock Connect Program And Its Risk-Prevention

This paper analyzes the cross-border flows of Shanghai-Hong Kong Stock Connect Program(SHSC)in terms of the balance sheets of participants and international balance of payments,researching the system design.It is found that the capital outflows brought by SHSC will not affect foreign exchange reserves.The inflow and outflow of capital will only bring about the increase or decrease of offshore RMB deposits.The main policy objective of SHSC is to promote the RMB Internationalization,establishing the offshore RMB assets pool,expanding the offshore RMB stock by outflow brought by Hong Kong stocks through(HKST),forming an offshore RMB reflow mechanism by Shanghai shares through(SHST).So in a way,the outflow brought by SHSC has some positive meaning.Granger causality test was used to examine the relationship of the changes of capital flows brought by transactions and the index change rates of Shanghai and Hong Kong Stock markets.Single factor analysis was used to find out the relationship between capital flows and the divergence of the exchange rates of RMB against Hong Kong Dollar between offshore and onshore.It's interesting to notice that domestic investors of HKST mainly trade to get foreign assets,for the sake of diversification,as well as foreign investors of SHST is mainly for the purpose of obtaining capital gains.And domestic investors are cautious about HKST,and when the fluctuation of RMB currency came out,domestic investors cut down HKST transactions both buy and sell.The system design avoids the speculative impact of overseas funds on domestic A-share market.The clearing system of offshore RMB deposits supervised by Chinese People's Bank can fully cope with the liquidity problems brought by SHSC.Risks are under control for now.If offshore RMB continues to increase,it may cause excessive surplus of offshore RMB,which will be converted into speculative money,sweep back in legal or illegal ways.It's difficult to monitor and control because it's “RMB”.That may hurt China's financial system,and even harm the healthy development of the real economy.In this regard,cross-border trade should be settled by offshore RMB as much as possible.And we should allow domestic enterprises to issue offshore RMB bonds,open more secondary market.In short,we should promote the use of offshore RMB.