Aimed at opening up China’s capital account and internationalizing the RMB, Shanghai-Hong Kong Stock Connect (Stock Connect) will benefit Hong Kong and overseas investors.
It opens the doors for investors to trade “A shares,” which are specialized shares of currency denominated in RMB traded on the Shanghai Stock Exchange.
On 10 April 2014, the Securities and Futures Commission (SFC) and China Securities Regulatory Commission (CSRC) announced the development of the mutual stock market access pilot program. Stock Connect will permit inter-stock market trading between the Stock Exchange of Hong Kong (SEHK) and the Shanghai Stock Exchange (SSE).
With an estimated six-month development period before the launch, Stock Connect was slated to commence Q4 of 2014. After setbacks and uncertainties in October from the lack of “relevant approval”, the SFC and the CSRC, on 10 November 2014, jointly approved the official launch of the Shanghai-Hong Kong Stock Connect scheduled to commence on Monday, 17th November 2014. The announcement can be found here.
The SEHK and SSE have created the basis of Stock Connect through the use of a subsidiary in each other’s respective markets. The SEHK Subsidiary set up in Shanghai and the SSE Subsidiary in Hong Kong will utilize order routing and direct trade orders from SEHK Exchange Participants (EPs) to the SSE trading platform and from SSE members to the SEHK platform, respectively.
All constituent stocks of the SSE 180 Index and 380 Index as well as “A shares” with corresponding
“H shares” on the SEHK, will be eligible for trading by EPs which has been termed “Northbound trading.”
Stock Connect will also allow “Southbound trading” which will permit mainland institutional investors and individual investors who meet a minimum capital requirement to trade “H shares” corresponding to SSE listed shares, as well as constituent stocks listed on the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index.
Market practices will usually adhere to the stock market in which the stocks are executed on, while clearing and settlement of trades will be conducted through clearing links established by the Hong Kong Securities Clearing Company Limited (HKSCC) and China Securities Depository and Clearing Corporation Limited (ChinaClear).
At the onset, both Northbound and Southbound trading will be subject to their own maximum cross boundary investment quota (aggregate quota) and daily quotas denominated in RMB. Applied under a “net buy” condition, investors will always be free to sell their cross-boundary securities but may be restricted from time to time in terms of purchasing.
Further details and regulations relating to Stock Connect are sure to follow. For more detailed information or most recent news, visit the Hong Kong Exchange and Clearing Limited’s website.