Hong Kong’s new dual counter listings model: Challenges and opportunities for brokers

In June 2023, the HKEX launched its new dual counter trading model. This allows Hong Kong-listed companies to trade in both Hong Kong Dollars (HKD) and Renminbi (RMB) using interchangeable tickers. The model is designed to boost liquidity in the Hong Kong market and to provide an extra channel for RMB investment. This presents a growth opportunity for Chinese broker firms, but there are a range of technical and business challenges to overcome. As dual counter listings become increasingly important in the China equities landscape, brokers need to consider which approach to take.

Renminbi internationalization and the dual counter listings model

The dual counter listings model is the latest development in the Chinese markets, and it supports the ongoing process of internationalization of the Renminbi. Over the last 20 years, China has taken a range of steps to establish the RMB as a global currency. According to Hong Kong University of Science and Technology, these steps include facilitating trade settlement in RMB, allowing RMB-denominated instruments (such as bonds), and boosting overseas RMB liquidity through currency swap agreements. Internationalization offers a range of benefits to the Chinese economy, including greater access to capital and reduced FX costs in international trade.

In the equities space, internationalization is already supported by the Stock Connect mutual market access link between the Shanghai, Shenzen, and Hong Kong exchanges. Now, the dual counter listings model is intended to pave the way for mainland Chinese investment in RMB-denominated securities on the Hong Kong market. There are also hopes that the model will attract additional liquidity from investors holding RMB reserves, both in Hong Kong and internationally. The South China Morning Post reports that Hong Kong has almost 1 trillion yuan in offshore funds and dual counter listings makes it easier for some of these funds to be invested in the equities market.

Designated shares on the Hong Kong exchange now have dual listings, allowing investors to trade and settle in either HKD or RMB. Initially, 24 companies have been dual listed, making up 35% of the total Hong Kong market capitalization. Additional companies can also apply to HKEX to be included in the program in the future. Both categories of shares have exactly the same voting rights and dividends. RMB counter codes are the same as the existing stock codes, with an ‘8’ appended. HKEX has also designated dual counter market makers to ensure that continuous buy and sell quotes are offered in both RMB and HKD listings.

How are brokers responding to dual counter listings?

For broker firms, especially those operating in both Hong Kong and mainland China, dual counter listings are a potential growth opportunity. By boosting available liquidity and reducing the barriers to trade, the new model promises to support sustained growth in their equities business.

However, the prospect of trading in multiple currencies within a single market also presents new challenges. For example, firms will now need to consider how to calculate their positions in dual counter stocks. Being able to do this quickly and accurately is crucial for effective risk management. Brokers need to consider the best approach to this problem. An operational solution, like carrying out position calculations manually, is relatively easy to implement. However, manual checks increase the risk of errors and are difficult to scale effectively. The alternative is to implement a technological solution, updating trading and risk management platforms to support dual counter listings. But brokers need to carefully consider the return on investment for such changes.

At the time of writing, the dual counter trading model has been operating for less than two months, which makes it hard to draw firm conclusions about how much volume is likely to be traded through the model in the future. If a tipping point is reached and dual counters become central to the Chinese equities landscape, brokers will need to make investments in their technology platforms, to ensure they’re able to trade them effectively. In the meantime, firms will be carefully monitoring how the situation develops.