Major risks associated with Stock Connect between Mainland and Hong Kong
Not protected by Investor Compensation Fund
Neither northbound trading nor southbound trading of Stock Connect are covered by the Investor Compensation Fund in Hong Kong. Besides, China Securities Investor Protection Fund in Mainland does not cover any northbound trades of Shanghai/Shenzhen stocks.
Difference in trading day and trading hours
Stock Connect will open on days when both the Mainland and Hong Kong stock markets are open for trading, and banking services in Mainland and Hong Kong are available on the corresponding settlement day. Given the differences in public holidays and working days between Mainland and Hong Kong, it is possible that Stock Connect is closed and investors cannot trade in A-shares during the day when the A-share market is open for trading. Investors shall note of the business days of Stock Connect. They should consider if they can take on the risk of price fluctuations in the A-share market during the time when Stock Connect is closed.
In addition, there is difference in trading hours between the Mainland and Hong Kong stock markets. Trading hours for A-shares under Shanghai Connect and Shenzhen Connect is different from Hong Kong and investors shall beware of such difference.
Restrictions on selling imposed by front-end monitoring
For investors who keep their A-shares outside of brokerage firms, if they want to sell certain A-shares they hold, they must transfer those A-shares to the respective accounts of brokerage firms before the market opens on the day of selling (T day). If they fail to meet this deadline, they will not be able to sell those A-shares on T day.
Situations which buying is not allowable
Under the following situations, investors cannot buy shares, but can only sell their holding through the stock trading link.
- A-shares removed from the list of eligible stocks under Shanghai Connect/Shenzhen Connect will only be allowed for selling but restricted from further buying. Investors shall beware of the change of the list of eligible A-shares.
- If the Northbound daily quota of Shanghai Connect/Shenzhen Connect is used up, i.e. the daily quota balance of Shanghai Connect/Shenzhen Connect drops to zero or the daily quota is exceeded during a continuous auction session (or closing call auction for SZSE), no further buy orders will be accepted for the remainder of the day while sell orders will still be accepted. Buying services will be resumed on the next trading day. Buy orders already accepted will not be affected by the daily quota being used up and will remain on the order book of SSE/SZSE unless otherwise cancelled by the relevant brokers.
If the used up of Northbound daily quota happens during the opening call auction session, new buy orders will be rejected. However, as order cancellation is common during opening call auction, the Northbound daily quota balance may resume to a positive level before the end of the opening call auction. When that happens, SEHK will again accept Northbound buy orders.
Mainland market risk
- Market volatility risk
The Mainland stock market is relatively volatile as it is mostly made up of retail investors who tend to be speculative and susceptible to the central government policies and news.
- Macro-economic risk
There is a close relationship between the Chinese economy and stock market performance. The Chinese economic growth is still above the global average, but has already shown signs of slowdown. Moreover, there is growing concern over the country's government and corporate debts.
- Currency risk
Hong Kong investors will expose to the risk of RMB exchange rate movements if they have to convert HKD into RMB for trading in Shanghai and Shenzhen A-shares. The conversion also incurs costs.
Movements in the RMB exchange rate will affect the profits and debts of the Mainland listed companies. Such effects will be more significant to those export-oriented companies and companies having debts denominated in currencies other than RMB.
- Policy risk
Central government's economic and financial policies will affect the performance of investment market. You shall beware of the central government policies for stimulating the economy or supporting different industries, as well as their different financial policies in respect of the currency, interest rate, credit and stock markets.
Risks relating to ChiNext Board of SZSE
Certain eligible A-shares under Shenzhen Connect are listed on the SZSE's ChiNext Board, which will be limited to the institutional professional investors at the initial stage of Shenzhen Connect. Generally, stocks listed on ChiNext Board contain higher risk than those listed on Main Board.
- Regulatory risk
The listing requirements of ChiNext Board are less stringent than Main Board and SME Board, e.g. requiring a shorter track record period and lower net profit, revenue and operating cash flow. Moreover, the disclosure rules applied to the ChiNext Board are different from Main Board and SME Board. For example, ad hoc reports of ChiNext companies are only required to be published on a CSRC designated website and on the issuers' website. If investors continue to check information through the usual disclosure channels for Main Board and SME Board, they may miss out some important information disclosed by ChiNext companies.
- Operating risk
Companies listed on ChiNext Board are generally in the early stage of development, whose business is unstable, profitability is low, and less resilient against market and industry risks. Operating risks experienced by these companies often include technical failure, new products are not well-received by the market, failure to catch up the market development and any changes in the founder, management team and core technician team.
- Delisting risk
Compared to the Main Board, the proportion of companies delisting is higher on the ChiNext Board.
- Fluctuation in stock price
As companies listed on ChiNext Board are relatively small and their business performance are unstable, they are more vulnerable to speculation. Share price of the ChiNext stocks is more volatile.
- Technical risk
Companies listed on ChiNext Board are mainly high technology companies, whose success is subject to technical innovations. However, these companies are exposed to the risks and challenges relating to technical innovation, such as high R&D costs, technical failure, and rapid development and replacement in technology and product market.
- Risks relating to valuation
Generally, it is difficult to estimate the value of a company listed on ChiNext Board as they are in the early stage of development with short operating history and unstable profits and cash flow. Therefore, traditional valuation method, such as price-to-earnings ratio and price-to-book ratio, is difficult to be applied.