Shanghai-Hong Kong Stock Connect goes live
November 17, 2014

After seven months of planning, the trading link between the Hong Kong and Shanghai bourses has today gone live.

Shanghai-Hong Kong Stock Connect (Stock Connect) is a key milestone in the capital market liberalization of China, the world's second largest economy by nominal GDP. It gives China a controlled mechanism to open up its equity capital markets, allowing foreign investors to trade China's Mainland A-shares through the Hong Kong exchange (HKEx), while those in Mainland China can trade Hong Kong shares through the Shanghai exchange, subject to quotas.

Who can participate?

All Hong Kong and overseas investors can now trade Shanghai shares through a Hong Kong broker, placing an order on HKEx using the northbound leg of Stock Connect. Unlike the Qualified Foreign Institutional Investor (QFII) scheme introduced in 2002, investors do not have to obtain approval before they trade.

Mainland institutions and individuals will need at least 500,000 yuan (US$80,000) in their trading account to acquire H-shares via the southbound leg.

The People's Republic has placed a quota of 300 billion yuan ($50 billion) on the northbound leg, and also a daily cap of 13 billion yuan ($2 billion). A quota of 250 billion yuan, and daily cap of 10.5 billion yuan, apply to the southbound leg. It is expected that these quotas will be raised, and eventually lifted, over time.

Impact on trading volumes

Ahead of the launch, the scheme was expected to generate a surge of inbound investment into Mainland China, along with a smaller boost to outbound investment from the Mainland into Hong Hong. This came to fruition on launch day with, by mid-morning, around 70 percent of the 13 billion yuan northbound daily quota having been used, against less than 10 percent of the 10.5 billion yuan southbound daily quota. The full northbound quota was exhausted by just before 2pm while, at close of the day's trading, 83 percent of the southbound quota was used up.

HKEx and Shanghai Stock Exchange are currently the world's sixth and seventh largest by market capitalization. Stock Connect could potentially be rolled out to other venues, such as Shenzhen Stock Exchange, which is ninth largest globally. It could also be a precursor to full integration of bourses in Greater China -- with such a combined trading venue being second only to the New York Stock Exchange.

Impact on offshore Renminbi business

While the pool of Renminbi (RMB) deposits in Hong Kong may be depleted at the outset, as foreign investors acquire A-shares, this should be tempered by a relaxation of currency conversion limits by the Hong Kong Monetary Authority (HKMA), effective October 27. As the territory's de facto central bank, HKMA has designated seven banks -- Bank of China, BNP Paribas, China Construction Bank, Citi, HSBC, ICBC and Standard Chartered -- as ‘primary liquidity providers' which entitles each of them to a dedicated RMB 2 billion ($330 million) repo facility.

Over the medium term, Stock Connect is expected to boost further the development of the offshore RMB business in Hong Kong.

Capital gains tax

This past Friday, the Finance Ministry announced a waiver of Chinese tax on capital gains arising from A-shares bought by foreign investors. While this is for an unspecified period, it brings greater certainty and may serve as a boost to Stock Connect and to investment through the QFII scheme.

Remaining restrictions

For the northbound leg, investors face an impediment in that Shanghai requires pre-delivery of securities to their broker, one business day before trading. As well as the practical and market-timing difficulties this presents, investors fear that it may signal intentions to the market. The Hong Kong exchange is understood to be working on a fix that it hopes will be ready by mid-2015. Meanwhile, several banks have launched seamless execution-to-custody services which overcome the need to pre-deliver.





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After seven months of planning, the trading link between the Hong Kong and Shanghai bourses has today gone live.

Shanghai-Hong Kong Stock Connect (Stock Connect) is a key milestone in the capital market liberalization of China, the world's second largest economy by nominal GDP. It gives China a controlled mechanism to open up its equity capital markets, allowing foreign investors to trade China's Mainland A-shares through the Hong Kong exchange (HKEx), while those in Mainland China can trade Hong Kong shares through the Shanghai exchange, subject to quotas.

Who can participate?

All Hong Kong and overseas investors can now trade Shanghai shares through a Hong Kong broker, placing an order on HKEx using the northbound leg of Stock Connect. Unlike the Qualified Foreign Institutional Investor (QFII) scheme introduced in 2002, investors do not have to obtain approval before they trade.

Mainland institutions and individuals will need at least 500,000 yuan (US$80,000) in their trading account to acquire H-shares via the southbound leg.

The People's Republic has placed a quota of 300 billion yuan ($50 billion) on the northbound leg, and also a daily cap of 13 billion yuan ($2 billion). A quota of 250 billion yuan, and daily cap of 10.5 billion yuan, apply to the southbound leg. It is expected that these quotas will be raised, and eventually lifted, over time.

Impact on trading volumes

Ahead of the launch, the scheme was expected to generate a surge of inbound investment into Mainland China, along with a smaller boost to outbound investment from the Mainland into Hong Hong. This came to fruition on launch day with, by mid-morning, around 70 percent of the 13 billion yuan northbound daily quota having been used, against less than 10 percent of the 10.5 billion yuan southbound daily quota. The full northbound quota was exhausted by just before 2pm while, at close of the day's trading, 83 percent of the southbound quota was used up.

HKEx and Shanghai Stock Exchange are currently the world's sixth and seventh largest by market capitalization. Stock Connect could potentially be rolled out to other venues, such as Shenzhen Stock Exchange, which is ninth largest globally. It could also be a precursor to full integration of bourses in Greater China -- with such a combined trading venue being second only to the New York Stock Exchange.

Impact on offshore Renminbi business

While the pool of Renminbi (RMB) deposits in Hong Kong may be depleted at the outset, as foreign investors acquire A-shares, this should be tempered by a relaxation of currency conversion limits by the Hong Kong Monetary Authority (HKMA), effective October 27. As the territory's de facto central bank, HKMA has designated seven banks -- Bank of China, BNP Paribas, China Construction Bank, Citi, HSBC, ICBC and Standard Chartered -- as ‘primary liquidity providers' which entitles each of them to a dedicated RMB 2 billion ($330 million) repo facility.

Over the medium term, Stock Connect is expected to boost further the development of the offshore RMB business in Hong Kong.

Capital gains tax

This past Friday, the Finance Ministry announced a waiver of Chinese tax on capital gains arising from A-shares bought by foreign investors. While this is for an unspecified period, it brings greater certainty and may serve as a boost to Stock Connect and to investment through the QFII scheme.

Remaining restrictions

For the northbound leg, investors face an impediment in that Shanghai requires pre-delivery of securities to their broker, one business day before trading. As well as the practical and market-timing difficulties this presents, investors fear that it may signal intentions to the market. The Hong Kong exchange is understood to be working on a fix that it hopes will be ready by mid-2015. Meanwhile, several banks have launched seamless execution-to-custody services which overcome the need to pre-deliver.