Green light is finally given to the long-expected Shenzhen-Hong Kong Stock Connect.
There will be no aggregate quota under Shenzhen-Hong Kong Stock Connect; the Shenzhen-Hong Kong Stock Connect daily quota will be the same as that currently under Shanghai-Hong Kong Stock Connect; at the initial stage of the Shenzhen Northbound Connect, investors eligible to trade shares that are listed on the ChiNext Board of Shenzhen Stock Exchange (SZSE) under the Shenzhen Northbound Connect will be limited to institutional professional investors as defined in the relevant Hong Kong rules and regulations; the threshold for mainland individual investors is not lowered; it is decided to include exchange-traded funds (ETFs) as eligible securities under the mutual market access scheme after relevant conditions are satisfied. Compared with Shanghai-Hong Kong Stock Connect, some regulations are changed while others are not. Hong Kong Exchanges and Clearing Limited (HKEx) held a press conference last night, and HKEx Chief Executive Charles Li Xiaojia set forth the stories behind the decision of launching Shenzhen-Hong Kong Stock Connect.
Different investors prefer different ways of trading
As expected by the market, there will be no aggregate quota under Shenzhen-Hong Kong Stock Connect and the aggregate quota under Shanghai-Hong Kong Stock Connect will be abolished. The Shenzhen-Hong Kong Stock Connect daily quota will be the same as that currently under Shanghai-Hong Kong Stock Connect, that is, a daily quota of 13 billion yuan is set for the Shenzhen Northbound Connect and a daily quota of 10.5 billion yuan is set for the Shenzhen Southbound Connect under Shenzhen-Hong Kong Stock Connect. The investment quota may be adjusted by the parties in light of actual operational performance.
Charles Li Xiaojia pointed out that after two-year stable and safe operation, no significant problems are seen in Shanghai-Hong Kong Stock Connect. China is now advancing the opening up, and abolishing the aggregate quota demonstrates the regulators’ great confidence about the operation of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect. As to the limitation on daily quota, it can help to stabilize the market in case unexpected large-scale capital flow is seen in the market.
Charles Li Xiaojia also believes that the launching of Shenzhen-Hong Kong Stock Connect will improbably split the funds originally flowing to Shanghai-Hong Kong Stock Connect. “Those building the bridge always hope that it is useful and that trading volume grows larger and larger. The stocks listed on the SZSE are different from those listed on Shanghai Stock Exchange (SSE). The Shenzhen Southbound Connect under Shenzhen-Hong Kong Stock Connect covers nearly 100 Hong Kong stocks which are not covered by the Shanghai Southbound Connect under Shanghai-Hong Kong Stock Connect. Investors being used to Shanghai-Hong Kong Stock Connect can continue to trade through it, while for investors who prefer operation through their accounts in the SZSE or want to buy Hong Kong stocks that are excluded in the Shanghai Southbound Connect under Shanghai Hong Kong Stock Connect, they can trade through Shenzhen-Hong Kong Stock Connect. Either for southbound trading or northbound trading, enough liquidity is seen in the market.”
As introduced by the HKEx, around 880 eligible stocks will be covered under the Shenzhen Northbound Connect. Any constituent stock of the SZSE Component Index and SZSE Small/Mid Cap Innovation Index which has a market capitalization of 6 billion yuan or above and all SZSE-listed shares of companies which have issued both A shares and H shares will be covered. But at the initial stage, investors eligible to trade shares that are listed on the ChiNext Board of Shenzhen Stock Exchange under the Northbound Shenzhen Trading Link will be limited to institutional professional investors.
While for the Shenzhen Southbound Connect, 417 eligible stocks will be covered. Besides the 318 stocks under Shanghai Southbound Connect, any constituent stock of the Hang Seng Composite SmallCap Index which has a market capitalization of 5 billion Hong Kong dollars or above, and all shares of companies which have issued both A shares and H shares on the SZSE and HKEx will be included into the scope of eligible shares.
Only institutions allowed to invest in ChiNext Board at early stage
It is introduced by Li that there are about 200 stocks on the ChiNext Board included in the Shenzhen-Hong Kong Stock Connect, but only institutional professional investors are allowed to participate in the ChiNext Board at early stage.
Li indicated that there is threshold for individual investors from mainland to join in the ChiNext Board. Like mainland investors, retail investors from Hong Kong can invest in the ChiNext Board after being reminded of relevant risks. At present, efforts are made in work related to retail investors from Hong Kong investing in ChiNext Board and it only accepts institutional professional investors acknowledged by Securities and Futures Commission (SFC) of Hong Kong at early stage.
It is noteworthy that the market highly expects lower threshold for individual investors to join in Shanghai-Hong Kong Stock Connect, but it is not mentioned in the joint announcement. According to Shanghai Stock Exchange’s Guidance on Eligibility Management of Investors in Southbound Trading, domestic investors participating in the Southbound Trading are only limited to institutional investors or individual investors with balance in securities accounts (including capital) no less than 500,000 yuan. Li said that Shenzhen-Hong Kong Stock Connect will keep this requirement, but stressed that the restrictions will be looser and looser and the daily investment quota will be bigger in the future.
SH-HK and SZ-HK stock connects to see increasing turnover and expansion
According to the joint announcement, China Securities Regulatory Commission (CSRC) and the SFC have come to agreement on including ETFs as eligible securities under the mutual market access scheme, and it will be launched when relevant conditions are satisfied after introduction of Shenzhen-Hong Kong Stock Connect for a certain period.
Li said that as clearing and settlement systems of the two places are different and ETF is different from stock, this demands Shanghai, Shenzhen and Hong Kong bourses straighten out details. Only in this way can ETFs are included as eligible targets. “We have a lot to do but will do our best to introduce it next year.” said Li.
Li also pointed out that the approval on the Shenzhen-Hong Kong Stock Connect brings a qualitative leap to the connectivity. After infrastructure of secondary market is established, the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connects will see increasing turnover and expansion in the future. More and more stocks, and new stocks, bonds, indexes, commodities, derivatives and currencies will be also included.
In addition, transaction, settlement and charges will be kept unchanged under the Shenzhen-Hong Kong Stock Connect, namely, investors from the two places do transactions through local brokers and subsidiaries of local exchanges established in the other market submit orders. At present, HKEx has set up a new order routing company in Qianhai, Shenzhen city.
HKEx remarked that after the launch of Shenzhen-Hong Kong Stock Connect is announced, relevant work has to be done, such as revision of detailed rules, preparation of market participants and market exercise, market communication and education on investors. It will still take about 4 months before it is officially introduced.
Translated by Jennifer Lu & Vanessa Chen
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