The Shanghai-Hong Kong Stock Connect programme (Stock Connect), a scheme that will allow investors with access to one market to buy and sell eligible shares listed on the other market, was first announced in April 2014 and is gaining momentum. A four-party agreement between the Shanghai and Hong Kong stock exchanges and clearing houses was signed on 4 September 2014. Final details of the programme are expected to be released before the end of October 2014. The scheme has become a hot topic amongst fund managers globally, with almost all product issuers exploring how they can make use of Stock Connect, especially those without QFII or RQFII quotas.
The PRC Government originally ear marked RMB 270 billion RQFII quotas for Hong Kong-based asset management companies. However, these quotas for Hong Kong are already close to fully allocated to RQFII licence holders. As a result, industry participants are now turning their focus on Stock Connect in order to invest in China A Shares.
The PRC Government may be more inclined to promote Stock Connect rather than issuing further RQFII quotas: apart from the RQFII ETFs currently listed on the Hong Kong Stock Exchange, the majority of the RQFII funds in Hong Kong are RMB fixed income funds, whilst Stock Connect will stimulate interest in funds investing in PRC equities. Therefore, the next wave of products are likely to be equity funds making use of Stock Connect, creating a more balanced range of RMB denominated investment products.
As we count down towards the launch of Stock Connect, industry participants and industry associations are actively discussing with the Securities and Futures Commission (SFC) new product ideas for Hong Kong. At the same time, European counterparts are exploring the possibility of making use of Stock Connect for their UCITS funds, subject to the agreement of the relevant regulators.
The planned level of investments in China A Shares via Stock Connect varies from one fund house to another. Some portfolio managers only intend to invest 5% to 10% of a fund’s total net assets using Stock Connect. Others would like to make full use of Stock Connect together with RQFII. We expect the majority to invest around 10% to 30% of a China-related or RMB-related fund’s total net asset value in China A Shares via Stock Connect.
The SFC issued an FAQ on 22 September 2014 highlighting the disclosure requirements in Hong Kong and addressing whether such amendments will require the SFC’s prior approval. The FAQ divides funds into three categories depending on the level of investment in China A Shares.
The first category is where a fund invests more than 30% of its NAV in China A Shares. The FAQ does not detail the specific disclosures required, but product issuers are asked to consider whether the use of Stock Connect amounts to a material change (which requires the SFC’s prior approval). In any event, affected investors should be notified of the changes and the fund’s offering documents should be updated.
The second category is where a fund invests between 10% to 30% of its NAV in China A Shares. It appears from the FAQ such investments in China A Shares would be considered as ancillary and therefore SFC prior approval would not be required. However, investors should be notified of the changes and the fund’s offering documents should be updated.
The final category is where a fund invests not more than 10% of its NAV in China A Shares. As the investment in China A Shares is minimal, SFC prior approval is not required. However, fund managers are reminded to enhance existing disclosures and/or add further clarifications in the offering documents.
Whilst the FAQ mainly sets out the SFC’s approval requirements in relation to the use of Stock Connect, industry participants will still need to work closely with the SFC to develop a set of suitable disclosures for Stock Connect.