According to the joint announcement of the China Securities Regulatory Commission ("CSRC") and the Securities and Futures Commission of Hong Kong ("SFC") dated 16 August 2016, the two regulatory authorities have approved, in principle, the establishment of the long-awaited Shenzhen-Hong Kong Stock Connect by the Shenzhen Stock Exchange ("SZSE"), The Stock Exchange of Hong Kong Limited ("SEHK"), China Securities Depository and Clearing Corporation Limited, and Hong Kong Securities Clearing Company Limited. Although the official launch date has not been announced, the Shenzhen-Hong Kong Stock Connect is expected to launch by the end of this year.
The Shenzhen-Hong Kong Stock Connect is the second cross border stock trading scheme between China and Hong Kong after the Shanghai-Hong Kong Stock Connect launched on 17 November 2014. The Shenzhen-Hong Kong Stock Connect will primarily follow the existing model of Shanghai-Hong Kong Stock Connect. The major features of the Shenzhen-Hong Kong Stock Connect are described as follows.
- Eligible Investors
a. Similar to the Shanghai-Hong Kong Stock Connect, Hong Kong and foreign investors may through certain licensed stockbrokers in Hong Kong ("Hong Kong Investors") trade in eligible stocks listed on SZSE as set out below ("Northbound Trading"). In respect of shares listed on the ChiNext Board of SZSE, only institutional professional investors (as defined under the Securities and Futures Ordinance and its related rules and regulations) will be eligible to trade initially.
b. Mainland institutional investors and those individual investors who hold an aggregate balance of not less than RMB 500,000 in their securities and cash accounts ("Mainland Investors") are allowed to trade eligible stocks listed on SEHK as set out below ("Southbound Trading").
- Trading limit
a. For Northbound Trading, Hong Kong Investors will be able to purchase eligible stocks listed on SZSE, subject to a daily quota of RMB 13 billion (in net flow);
b. For Southbound Trading, Mainland Investors will be able to trade eligible stocks listed on SEHK, subject to a daily quota at RMB 10.5 billion (in net flow);
c. There is no aggregate quota limits with respect to both Northbound Trading and Southbound Trading under the Shenzhen-Hong Kong Stock Connect. Important: It is noted that the aggregate quota limits under the Shanghai-Hong Kong Stock Connect will be abolished with immediate effect.
- Eligible Stocks
- constituent stocks of the SZSE Component Index and SZSE Small/Mid Cap Innovation Index which companies have market capitalization of not less than RMB 6 million. These indices include shares listed on the Main Board, the Small and Medium Enterprise Board and the ChiNext Board of SZSE.
Shares under “risk alert” or delisting arrangement will be excluded from Northbound Trading.
b. For Southbound Trading, the scope of eligible stocks will include:
- constituent stocks of the Hang Seng Composite SmallCap Index in which companies have market capitalization of not less than HKD 5 billion; and
- all the H shares of SEHK-listed companies that have A shares listed on SZSE or the Shanghai Stock Exchange.
H shares having corresponding A shares under “risk alert” or delisting arrangement will be excluded from Southbound Trading.
The green light given by the Chinese government shows its determination and commitment to further open up China’s capital market to the international financial market. Since the Shenzhen-Hong Kong Stock Connect is largely modeled on the Shanghai-Hong Kong Stock Connect, it is anticipated to be implemented with greater stability and smoothness.