On 10 April 2014, the China Securities Regulatory Commission (CSRC) and the Securities and Futures Commission (SFC) announced their approval-in-principle on the development of a pilot programme for establishing mutual stock market access between Mainland China and Hong Kong. The programme, named "Shanghai-Hong Kong Stock Connect" will operate between the Shanghai Stock Exchange (SSE) and The Stock Exchange of Hong Kong Limited (SEHK), The China Securities Depositories Clearing Corporation Limited (ChinaClear) and Hong Kong Securities Clearing Company Limited (HKSCC). The initiative is expected to provide opportunities and momentum for the long-term development of the Hong Kong capital market, enhance Hong Kong's market liquidity and broaden its investor base.
The programme will consist of two tracts:
• "Northbound trading" which will allow Hong Kong and overseas investors to trade, through SEHK Participants (EPs), selective A shares in the SSE. These include all constituent stocks from time to time of the SSE 180 Index and the SSE 380 Index and all listed A shares which have corresponding H shares listed on SEHK (unless they are not traded in RMB or are companies delisting or at risk of being delisted) and
• "Southbound trading" which will allow Mainland institutional investors and individual investors with not less than RMB 500,000 in their securities and cash accounts to trade the constituent stocks of the Hang Seng Composite LargeCap Index and the Hang Seng Composite MidCap Index, as well as any H shares with corresponding shares listed in the form of SSE-listed shares.
Trading under the Shanghai-Hong Kong Stock Connect will initially be subject to a maximum cross-boundary investment quota that caps the absolute amount of fund inflow and outflow into and from the Mainland (Aggregate Quota), together with a maximum value of cross-boundary trades each day (Daily Quota). Each of Northbound and Southbound trading will be subject to a separate set of Aggregate Quota and Daily Quota, monitored by SEHK and SSE respectively and applied on a "net buy" basis. Under this principle, investors will always be allowed to sell their cross-boundary securities regardless of the quota balance.
Northbound trading will have an Aggregate Quota of RMB 300 billion, with a Daily Quota of RMB 13 billion. Southbound trading will have an Aggregate Quota of RMB 250 billion and a Daily Quota of RMB 10.5 billion. SEHK will calculate the Northbound Aggregate Quota Balance at the end of each trading day, and suspend Northbound buying should the Aggregate Quota fall below the Daily Quota. However, investors can continue to sell SSE securities, thereby increasing the Aggregate Quota Balance and SEHK will re-open Northbound buying once the Aggregate Quota Balance returns to the Daily Quota level or above.
Shanghai-Hong Kong Stock Connect will be open to all EPs, SSE Members, HKSCC Clearing Participants, and ChinaClear Participants, subject to their meeting certain information technology capability, risk management and other requirements as may be specified by the relevant exchange and/or clearing house.
ChinaClear and HKSCC will establish a direct link for the cross-boundary clearing, each of them becoming the other's direct participant in providing clearing services for Shanghai-Hong Kong Stock Connect. SEHK and SSE will establish mutual order-routing connectivity and related technical infrastructure to allow investors to trade securities in the other's market. The trading and clearing arrangements will be subject to the regulations and operational rules of the market where the trading in question takes place, while listed companies will only be subjected to rules and regulations of the market in which they are listed.
Both the CSRC and the SFC will seek to enhance cross-boundary regulatory and enforcement cooperation to respond to misconduct on either or both markets. It is intended that current bilateral agreements will be strengthened, with enhanced cooperation in four key areas:
- Referral and information exchange mechanisms concerning improper activities;
- Investigatory cooperation in relation to cross boundary illegal activities including disclosure of false or misleading information, insider dealing and market manipulation;
- Bilateral enforcement exchange and training; and
- Enhancement of general standards of cross--boundary enforcement cooperation.
Hong Kong investors participating in the programme will continue to be protected by Hong Kong laws should they continue to deal with EPs. However, any Northbound trading will not be covered by the current Investor Compensation Fund.
Hong Kong and overseas investors can only hold SSE securities through their brokers/custodians, their ownership of such reflected in their brokers/custodians' own records such as client statements. In addition, in accordance with existing Mainland market practice, Hong Kong and overseas investors as beneficial owners of the SSE securities, will not be able to attend meetings as proxy in person.
It is expected that the Shanghai-Hong Kong Stock Connect will be formally launched in October 2015. Market participants and other corporations intending to provide related services under the Shanghai-Hong Kong Connect programme should keep an eye on the developments in this area and seek professional advice on the changes required to be made to their internal systems and terms and conditions as and when regulatory provisions are clarified.