On 10 April, 2014 the China Securities Regulatory Commission
("CSRC") and the Hong Kong Securities and Futures
Commission ("SFC") announced that they have approved, in
principle, the development of a pilot programme
("Shanghai-Hong Kong Stock Connect") for establishing
mutual stock market access between Mainland China and Hong
Shanghai-Hong Kong Stock Connect will operate between the
Shanghai Stock Exchange ("SSE"), the Stock Exchange of
Hong Kong Limited ("SEHK"), China Securities Depository
and Clearing Corporation Limited ("ChinaClear") and Hong
Kong Securities Clearing Company Limited ("HKSCC").
Currently, the only option for mainland investors who wish to
invest in stocks listed on non-Mainland stock exchanges is to
utilise the Qualified Domestic Institutional Investor
("QDII") program. Foreign investors' access to
mainland listed stocks is similarly controlled through various
quota programs. Such investors may invest in B-shares (shares of
companies based in China that are traded on the Shanghai Stock
Exchange in U.S. dollars or on the Shenzhen Stock exchange in Hong
Kong dollars) and in A-shares (shares that are traded on the two
Mainland stock exchanges in Renminbi) through the Qualified Foreign
Institutional Investor ("QFII") program and the Renminbi
Qualified Foreign Institutional Investor ("RQFII")
program. For further information on both of those programs please
see the Dillon Eustace publication
Irish Funds-Gateway to the Chinese Securities Markets
The CSRC and the SFC are also working on the creation of a
mutual recognition platform for locally domiciled funds in Hong
Kong and Mainland China, which, if adopted, will enable funds
established in either market to be distributed in the other market
where they satisfy the criteria established by both regulators.
FIVE PRINCIPAL ELEMENTS OF THE SHANGHAI-HONG KONG STOCK
Trading under Shanghai-Hong Kong Stock Connect will initially be
subject to a maximum cross-boundary investment quota, together with
a daily quota that will be monitored on a real time basis. A
Northbound Trading Link will be established which will permit Hong
Kong investors to place orders to trade eligible shares quoted on
the SSE subject to an aggregate quota of RMB300 billion and a daily
quota of RMB13 billion. A Southbound Trading Link will also be
established which will permit Mainland investors to place orders to
trade eligible shares listed on the SEHK subject to an aggregate
quota of RMB250 billion and a daily quota of RMB10.5 billion.
While the quotas under the Shanghai-Hong Kong Stock Connect
Project are not as large as the quota granted under the QDII, QFII
and RQFII programs, the announcement does provide that the initial
quotas may be adjusted in the future.
Initially, the SFC will require Mainland investors participating
in the Southbound Trading Link to be limited to institutional
investors, and those individual investors who hold an aggregate
balance of not less than RMB 500,000 in their securities and cash
accounts. There is no mention of requirements being imposed by CSRC
on investors in Hong Kong.
Under the pilot programme, all the constituents of the SSE 180
Index and SSE 380 Index, and shares of all SSE-listed companies
which have issued both A shares and H shares will be eligible to be
traded through the Northbound Trading Link. All the constituents of
the Hang Seng Composite LargeCap Index and Hang Seng Composite
MidCap Index, and shares of all companies listed on both SSE and
SEHK Shares are eligible to be traded through the Southbound
Trading Link. The announcement specifically provides that the scope
of Shanghai-Hong Kong Stock Connect is subject to further
adjustment following its launch.
Applicable Trading, Clearing and Listing Rules
Trading and clearing arrangements will be subject to the
regulations and operational rules of the market where trading and
clearing take place. Listed companies will continue to be subject
only to the listing and other rules and regulations of the markets
where they are listed.
Clearing will occur through a direct link to be established
through ChinaClear and HKSCC.
The Shanghai-Hong Kong Stock Connect project is another
important development in the opening up of China's capital
markets and shows the continuing determination of the Chinese
authorities to attract foreign investors into the Chinese capital
markets and indeed to allow Chinese investors access to
international capital markets. It is a part of a series of
developments consisting of improvements to existing schemes (QFII
and RQFII) and development of new schemes (mutual recognition)
which will be watched closely by investors seeking to access the
Mainland capital markets.
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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