Getting to know Shanghai-Hong Kong Stock Connect and the Mainland stock market
The Stock Exchange of Hong Kong Limited (SEHK), Shanghai Stock Exchange (SSE), China Securities Depository and Clearing Corporation Limited (ChinaClear) and Hong Kong Securities Clearing Company Limited (HKSCC) are preparing to launch a pilot programme - Shanghai-Hong Kong Stock Connect - for establishing mutual stock market access between Hong Kong and mainland China.
This new cross-border investment channel brought by the Shanghai-Hong Kong Stock Connect will enable investors in Hong Kong and the Mainland to trade a specified range of listed stocks in each other’s market through their respective local securities companies, thereby helping to promote and strengthen the connection between Hong Kong and the Mainland capital markets.
At present, individual investors, in Hong Kong or from overseas, can only participate indirectly in the Mainland’s securities markets through certain investment products such as the Qualified Foreign Institutional Investor (QFII) funds, Renminbi Qualified Foreign Institutional Investor (RQFII) funds and RQFII A-share Exchange Traded Funds (ETFs).In future, after the launch of Shanghai-Hong Kong Stock Connect, not only these investment products will be made available to Hong Kong and overseas individual investors, they will also be able to trade eligible Shanghai-listed A-shares directly. Under this programme, Mainland investors (including individual investors) will be able to trade eligible Hong Kong-listed stocks directly.
Features of Shanghai-Hong Kong Stock Connect
- Investment quota
Trading under Shanghai-Hong Kong Stock Connect will initially be subject to an aggregate cross-boundary investment quota (“aggregate quota”) as well as a daily quota. The Northbound trading (ie the trading of A-shares by Hong Kong and overseas investors or so-called SSE security) and the Southbound trading (ie the trading of Hong Kong shares by Mainland investors or so-called SEHK security) are each subject to different aggregate quota and daily quota. Details of the quotas are given in the following table:
Northbound trading Southbound trading Aggregate quota RMB300 billion RMB250 billion Daily quota RMB13 billion RMB10.5 billion
Investors should note that the aggregate quotas and the daily quotas are calculated on a “net buy” basis and the respective balances are illustrated as follows:
Aggregate quota balance = Aggregate quota – Aggregate buy trades + Aggregate sell trades
Daily quota balance = Daily quota – Buy orders + Sell trades + Adjustments*
*Daily quota balance will be increased when:
- a buy order is cancelled;
- a buy order is rejected by the other exchange; or
- a buy order is executed at a better price.
- Eligible stocks
In the initial phase, Shanghai-Hong Kong Stock Connect is applicable only to stocks under the following scope:
Northbound trading Southbound trading Index Constituent Stocks SSE 180 Index and SSE 380 Index Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index A+H Shares SSE-listed shares which are simultaneously listed and traded on SEHK H-shares which are simultaneously listed and traded on SSE Excluding All SSE-listed shares which are not traded in RMB or which are under risk alert All Hong Kong-listed shares which are not traded in HKD; H-shares which have corresponding A-shares listed and traded on a Mainland exchange other than SSE; H-shares which have corresponding SSE-listed shares placed under risk alert
Investors will only be allowed to sell an SSE security but restricted from further buying if:
- the SSE security subsequently ceases to be a constituent stock of the relevant indices; and/or
- the SSE security is subsequently under “risk alert”; and/or
- the corresponding H share of the SSE security subsequently ceases to be traded on SEHK,
as the case may be.
Investors will only be allowed to sell an SEHK security but restricted from further buying if:
- the SEHK security subsequently ceases to be a constituent stock of the relevant indices; and/or
- the corresponding A share of the SEHK security ceases to be traded on SSE; and/or
- where the SEHK security is an H share and the share of the issuer of such SEHK security is subsequently listed on an exchange on the Mainland other than SSE, as the case may be.
- Differences in trading day
Investors should note that, due to differences in public holidays between Hong Kong and mainland China, there may be differences in the trading days in the two markets. Even if Mainland markets are open on a certain day, investors may not necessarily be able to invest in A-shares through Northbound trading. For example, the Hong Kong market will close on Easter and Christmas every year, but those are trading days in mainland China.
Likewise, during Lunar New Year and the National Day golden week periods, mainland China will usually arrange for seven-day consecutive holidays by reshuffling workdays and weekends. Even on days both markets are open for business, there could be differences because of other reasons such as bad weather conditions. In the initial stage of operation of Shanghai-Hong Kong Stock Connect, investors will only be allowed to trade on the other market on days where both markets are open for trading, and banking services are available in both markets on the corresponding settlement days.
- Deposition and custody of stocks
The A-shares traded by Hong Kong and overseas investors through Shanghai-Hong Kong Stock Connect are issued in scripless form, so investors will not hold any physical A-shares. Instead, they will only hold these A-shares through their brokers or custodians and their ownership is indicated in their brokers/custodians’ records such as client statements. This is different to the fact that holders of Hong Kong shares can choose to hold physical shares under their own names or in the name of HKSCC nominees.
- Investment quota
Comparison of the operations of the A-share and Hong Kong stock markets
Since the operating rules and market practices of Mainland A-share market are different from those in Hong Kong, before investing in A-shares through Shanghai-Hong Kong Stock Connect, you should understand clearly these differences, such as stock codes, corporate announcements and trading fees, etc. Below are some of the examples:
Mainland A-share market Hong Kong stock market Stock code 6 digits 5 digits Trading hours* 09.30-11.30
Trading board lot size 100 shares per lot No. of shares per lot determined by the listing company Tick size RMB0.01 Determined by share price Price limit ±10% and ±5% for SSE stocks in the risk alert board No limit Maximum order size 1 million shares No limit Day trading Not allowed, shares bought on T-day can only be sold on and after T+1 day Allowed Odd lots Can only be sold Can be traded, odd lots prices may be worse than the prevailing market prices Trading fees** Handling Fee, Securities Management Fee, Transfer Fee, stamp duty Trading Fee, Transaction Levy, stamp duty Clearing and settlement cycle Shares will be settled on T day; money will be settled on T+1 day Both shares and money will be settled on T+2 day Issuing of corporate announcements Through SSE website and four officially appointed newspapers (Shanghai Securities News, Securities Times, China Securities Journal and Securities Daily) SEHK’s HKExnews website Language of corporate announcements Simplified Chinese Traditional Chinese and English
* Exclusive of the pre-opening session
** For specific fees and levies, please refer to the related information published on SEHK’s Shanghai-Hong Kong Stock Connect webpage and SSE’s Shanghai-Hong Kong Stock Connect webpage
Points to note
When investing in A-shares through Shanghai-Hong Kong Stock Connect, you should take note of the following:
- Trading and settlement currency: Northbound investments in SSE securities will be traded and settled in Renminbi; Southbound investments in SEHK securities will be traded in Hong Kong dollars and settled in Renminbi. Hong Kong brokers can offer currency exchange services to Northbound trading investors.
- Short selling: In investing in A-share via the Northbound trading, Hong Kong and overseas investors are prohibited from naked short selling in A-shares. In selling A-shares via the Northbound trading, Hong Kong and overseas investors are not allowed to participate in any securities lending on the Mainland.
- Front-end monitoring: According to Mainland regulations, before an investor sells any share, there should be sufficient shares in the account, otherwise SSE will reject the sell order concerned. SEHK will carry out pre-trade checking on A-share sell orders of its participants (ie the stock brokers) to ensure there is no over-selling.
- Subscription of new stock issues: Through Shanghai-Hong Kong Stock Connect, Hong Kong and overseas investors can only participate in trading SSE A-shares in the secondary market and cannot participate in SSE’s initial public offering activities. Likewise, Mainland investors cannot subscribe to new stock issues in Hong Kong via Shanghai-Hong Kong Stock Connect.
- Trading fees: In addition to paying trading fees and stamp duties in connection with A-share trading, investors carrying out Northbound trading via Shanghai-Hong Kong Stock Connect should also take note of any new portfolio fees, dividend tax and tax concerned with income arising from stock transfers which are yet to be determined by the relevant authorities.
- Shareholders’ meetings: Hong Kong and overseas investors are holding SSE securities traded via Shanghai-Hong Kong Stock Connect through their brokers or custodians while HKSCC is providing them nominee services such as distribution of shareholders’ meeting notices, consolidation and submission of voting instructions, etc. According to existing Mainland practices, Hong Kong and overseas investors as beneficial owners of SSE securities traded via Shanghai-Hong Kong Stock Connect cannot appoint proxies to attend shareholders’ meetings on their behalf. This is in contrast to what they can do in Hong Kong if they hold Hong Kong stocks.
- Disclosure obligations: Under the current Mainland rules, once an investor holds up to 5% of the shares of a company listed on the SSE, the investor is required to disclose his interest within three working days and during which he cannot trade the shares of that company. The investor is also required to disclose any change in his shareholding and comply with related trading restrictions in accordance with the Mainland rules.
In Hong Kong, there are also detailed requirements on disclosure of interest related to listed corporations. One basic disclosure requirement is that an investor holding 5% or more of the shares of a listed company must disclose his interest within three working days.
The outlines of such requirements are published in the website of Hong Kong’s Securities and Futures Commission (SFC) to provide guidance for investors.
Foreign shareholding restrictions: The China Securities Regulatory Commission stipulates that, when holding Mainland A-shares through Shanghai-Hong Kong Stock Connect, Hong Kong and overseas investors are subject to the following shareholding restrictions:
- Single foreign investors’ shareholding by any Hong Kong or overseas investor in an A share must not exceed 10% of the total issued shares; and
- Aggregate foreign investors’ shareholding by all Hong Kong and overseas investors in an A share must not exceed 30% of the total issue shares.
When Hong Kong and overseas investors carry out strategic investments in listed companies in accordance with the rules, the shareholding of the strategic investments is not capped by the above-mentioned percentages.
Should the shareholding of a single investor in an A-share listed company exceed the above restriction, the investor may be required to unwind his position on the excessive shareholding according to a last-in-first-out basis within a specific period. The Hong Kong and Shanghai exchanges will issue warnings or restrict the buy orders for the related A-shares if the percentage of total shareholding is approaching the upper limit.
- Not protected by Investor Compensation Fund
- Quotas used up
- Trading day
- Restrictions on selling imposed by front-end monitoring
- The recalling of eligible stocks
- Currency risks
Investors should note that any Northbound or Southbound trading under Shanghai-Hong Kong Stock Connect will not be covered by Hong Kong’s Investor Compensation Fund.
Hong Kong’s Investor Compensation Fund is established to pay compensation to investors of any nationality who suffer pecuniary losses as a result of default of a licensed intermediary or authorised financial institution in relation to exchange-traded products in Hong Kong. Examples of default are insolvency, in bankruptcy or winding up, breach of trust, defalcation, fraud, or misfeasance.
As far as Southbound trading is concerned, since Mainland securities brokers are neither licensees nor registered institutions with the SFC in Hong Kong and they are not regulated by the SFC, the Investor Compensation Fund will not cover Southbound trading via Shanghai-Hong Kong Stock Connect.
As for Northbound trading, according to the Securities and Futures Ordinance, the Investor Compensation Fund will only cover products traded in Hong Kong’s recognised securities market (SEHK) and recognised futures market (Hong Kong Futures Exchange Limited, HKFE). Since default matters in Northbound trading via Shanghai-Hong Kong Stock Connect do not involve products listed or traded in SEHK or HKFE, so similar to the case of investors trading overseas securities, they will not be covered by the Investor Compensation Fund.
For further information on Hong Kong’s Investor Compensation Fund, please refer to the website of Investor Compensation Company Limited.For information on licensees and registered institutions under the SFC, please consult the Public Register of Licensed Persons & Registered Institutions in the SFC website.
On the other hand, according to the Measures for the Administration of Securities Investor Protection Fund 《證券投資者保護基金管理辦法》, the functions of China Securities Investor Protection Fund (CSIPF, 中國投資者保護基金) include “indemnifying creditors as required by China’s relevant policies in case a securities company is subjected to compulsory regulatory measures including dissolution, closure, bankruptcy and administrative takeover by China Securities Regulatory Commission (CSRC) and custodian operation” or “other functions approved by the State Council”. As far as Hong Kong investors participating in Northbound trading are concerned, since they are carrying out Northbound trading through securities brokers in Hong Kong and these brokers are not Mainland brokers, therefore they are not protected by CSIPF on the Mainland.
When the respective aggregate quota balance for Northbound and Southbound trading is less than the daily quota, the corresponding buy orders will be suspended on the next trading day (sell orders will still be accepted) until the aggregate quota balance returns to the daily quota level.
Once the daily quota is used up, acceptance of the corresponding buy orders will also be immediately suspended and no further buy orders will be accepted for the remainder of the day. Buy orders which have been accepted will not be affected by the using up of the daily quota, while sell orders will be continued to be accepted. Depending on the aggregate quota balance situation, buying services will be resumed on the following trading day.
As mentioned above, Shanghai-Hong Kong Stock Connect will only operate on days when both markets are open for trading and when banks in both markets are open on the corresponding settlement days. So it is possible that there are occasions when it is a normal trading day for the Mainland market but Hong Kong investors cannot carry out any A-share trading. Investors should take note of the days Shanghai-Hong Kong Stock Connect is open for business and decide according to their own risk tolerance capability whether or not to take on the risk of price fluctuations in A-shares during the time when Shanghai-Hong Kong Stock Connect is not trading.
For investors who usually keep their A-shares outside of their brokers, if they want to sell certain A-shares they hold, they must transfer those A-shares to the respective accounts of their brokers 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.
When a stock is recalled from the scope of eligible stocks for trading via Shanghai-Hong Kong Stock Connect for above-mentioned reasons, the stock can only be sold but restricted from being bought. This may affect the investment portfolio or strategies of investors. Investors should therefore pay close attention to the list of eligible stocks as provided and renewed from time to time by SSE and SEHK.
Hong Kong and overseas investor who holds a local currency other than RMB will be exposed to currency risk if he/she invests in a RMB product due to the need for the conversion of the local currency into RMB. During the conversion, you will also incur currency conversion costs. Even if the price of the RMB asset remains the same when you purchase it and when you redeem / sell it, you will still incur a loss when you convert the redemption / sale proceeds into local currency if RMB has depreciated.
The above is only an overview of some of the risks related to Shanghai-Hong Kong Stock Connect.
It should take approximately six months from the date of the Joint Announcement of CSRC and SFC (10 April 2014) to complete the preparation for formal launch of Shanghai-Hong Kong Stock Connect. SSE, SEHK, ChinaClear and HKSCC are collaborating with each other to develop the operational and other components of Shanghai-Hong Kong Stock Connect prior to launch, including all necessary arrangements. The launch of Shanghai-Hong Kong Stock Connect will only take place once relevant trading and clearing rules and systems have been finalised as well as all regulatory approvals have been granted, market participants have had sufficient opportunity to configure and adapt their operational and technical systems. All necessary investor education programmes must also be in place.
The information and materials contained in this article are provided on an “as is” and “as available” basis and may be amended or changed as the implementation of Shanghai-Hong Kong Stock Connect and promulgation or preparation of the relevant rules, regulations, agreements and other documentation progresses.
The Investor Education Centre (IEC) in Hong Kong will run a series of education programmes on the Shanghai-Hong Kong Stock Connect. In addition, we will organise a free seminar jointly with Hong Kong Exchanges and Clearing Limited (HKEx) to explain to the general public information related to the Shanghai-Hong Kong Stock Connect. For registration details, please stay tuned with our website.
Shanghai-Hong Kong Stock Connect Seminar
Date: 22 September 2014
Venue: Exchange Auditorium, 1/F, One and Two Exchange Square, Central
The IEC will set up a dedicated Shanghai-Hong Kong Stock Connect webpage to further provide information on related operations and risks so that investors can better understand Shanghai-Hong Kong Stock Connect. Please stay tuned with IEC’s website.
For operational details of Shanghai-Hong Kong Stock Connect, please refer to the Shanghai-Hong Kong Stock Connect webpage of the HKEx website.