The Shanghai-Hong Kong Stock Connect (Stock Connect Scheme) is a
pilot program for establishing mutual stock market access between
Mainland China and Hong Kong. For a comprehensive overview and
analysis of the unresolved issues in the rules and operations of
the Stock Connect Scheme, please click here.
The Stock Connect Scheme was expected to go live on 27 October
2014. However, on 26 October 2014, the Hong Kong Exchanges and
Clearing Ltd (HKEx) issued an announcement indicating that it has
not received approval from the Chinese regulatory authorities for
its launch. No information was provided as to the length of the
delay or the intended launch date of the Stock Connect Scheme.
Status of the Stock Connect Scheme
It was previously announced that the Shanghai Stock Exchange
intended to run two pre-launch technology tests for system
readiness on 11 October 2014 and 18 October 2014, with a final full
trial to be completed on either 25 or 26 October 2014. Furthermore,
Charles Li, Chief Executive of HKEx, indicated that the Stock
Connect Scheme would be launched on a Monday. Based on the
information above, it was anticipated by industry insiders that the
Stock Connect Scheme would be launched on 27 October 2014.
As HKEx promised to give two weeks advance notice of the launch
date, speculation of a delay of the Stock Connect Scheme arose when
no such notice was given on 13 October 2014. These rumours were
fueled by an announcement by HKEx, on 21 October 2014, that the
pre-launch system readiness tests would only be confirmed upon the
announcement of the launch date.
On 26 October 2014, HKEx announced that, although the Stock
Connect Scheme is technically ready to be implemented by all the
relevant parties, HKEx had not received the relevant approval for
the launch of the Stock Connect Scheme from Chinese regulatory
Speaking to the media on 27 October 2014, Charles Li declined to
give a timetable for when approval might be granted, but he stated
that he hoped that the launch date would be soon.
This hope was echoed by Ashley Alder, Chief Executive of the
Securities and Futures Commission (SFC), on 28 October 2014, who
noted that the SFC had completed all the regulatory steps needed
for the launch of the Stock Connect Scheme and that he hoped that
trading would begin "in the not too distant future", but
did not provide a timeframe for the launch.
As of the date of this alert, the Chinese authorities have not
provided an explanation as to why the Stock Connect Scheme missed
its widely expected launch date of 27 October 2014.
Possible Reasons for Delay
Capital Gains Tax Issue
According to market professionals speaking at a Reuters China
Summit, the failure to reconcile the differences in capital gains
tax in Hong Kong and Mainland China is a critical reason for the
delay of the Stock Connect Scheme launch.
Under existing tax laws in China, a 10% tax is normally levied
on unrealized and realized capital gains, a 5.6% tax is also levied
on business profits and in contrast, Hong Kong does not charge
capital gains tax. Historically, China had not enforced the capital
gains tax against investments under the QFII or RQFII programs.
In a technical briefing in May 2014, the HKEx stated that the
issue on capital gains tax was subject to clarification from the
State Administration of Taxation in China, however there has been
no definitive statement released from the relevant Chinese tax
authorities on this issue as of the date of this alert.
Occupy Central Campaign
Given the statement from HKEx that the Stock Connect Scheme is
technically ready to be implemented, many industry insiders have
linked the delay of the Stock Connect Scheme to the recent Occupy
Central campaign in Hong Kong.
Charles Li stated that the Occupy Central campaign may have been
a reason for the delay in the launch of the Stock Connect Scheme.
He also stated that, although the financial market is stable at the
moment, the financial services sector would be affected if the
Currently, there is no information as to when the Stock Connect
Scheme will be formally launched. We will publish further alerts on
this topic when reliable information becomes available.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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