The eagerly anticipated Shanghai-Hong Kong Stock Connect (Stock Connect), or the so-called “through-train,” was launched on November 17, 2014, allowing foreign investors for the first time to directly buy and sell stocks listed in China. Just over two months into the scheme we are now seeing a substantial volume of investment, especially in the “Northbound” direction (i.e. using the well-established Hong Kong stock market as a platform for investment in Chinese companies.)

What Is Stock Connect?

Stock Connect allows foreign investors to buy and sell a range of “A” shares listed on the Shanghai Stock Exchange (SSE) through the Stock Exchange of Hong Kong Limited (SEHK), a wholly-owned subsidiary of the Hong Kong Exchanges and Clearing Limited (HKEx)—Northbound trading— and for mainlanders to buy and sell eligible Hong Kong shares through SSE—Southbound trading— subject to quotas.

Previously, individual foreign investors were only permitted to invest indirectly in China’s securities markets through limited 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).

Who Can Participate?

Northbound trading is open to all foreign investors, both institutional and individual. 

What Securities Can Be Traded?

Currently three types of SSE-listed securities can be traded:

  1. Constituent stocks of SSE 180 Index
  2. Constituent stocks of SSE 380 Index
  3. SSE shares with H Shares listed on HKEx

Other product types such as B shares, ETFs, bonds and other securities are not included. Stock Connect initially only covers secondary market trading and not primary market activities (such as initial public offerings). For details on shares excluded from Stock Connect and additional information, please refer to the HKEx website:

How Does It Work?

HKEx and SSE have established mutual order-routing connectivity and other technical infrastructure to enable investors in one market to trade shares listed on the other. This mechanism is illustrated below:

Click here to view image.

Simply put, foreign investors will trade SSE shares via an eligible Hong Kong broker which will pass the order to HKEx, which then sends it to Shanghai. The process is mirrored for mainland investors trading HKEx shares.

SSE-listed shares purchased by a foreign investor are held in trust by a broker or custodian in Shanghai on behalf of a foreign investor. 

Foreign investors will trade and settle in SSE-listed shares in Renminbi (RMB). When SSE-listed shares are sold by a foreign investor, the sales proceeds flow back to the seller’s account in Hong Kong, and thus cannot be re-invested within China without having first “come back” to Hong Kong.

Quotas For Northbound And Southbound Trades

The Northbound trade is capped at RMB13 billion daily and the aggregate quota is set at RMB300 billion in total on a “first come, first served” basis. The Southbound trade is capped at RMB10.5 billion daily with an aggregate quota of RMB250 billion. However, these limits are net, so when one investor sells, another can buy.

Once the daily quota is reached, investors can only sell but not buy for the remainder of the day.

Fees And Taxes For Northbound Trades For Foreign Investors

The fees and taxes currently applicable to Northbound trades are:

Initial Performance And The Future Of Stock Connect

On the first day of trading Hong Kong and foreign investors reached the RMB13 billion daily quota for Northbound trading. The utilisation rate dipped during the week of November 24-28 with the utilisation averaging 28.3 percent of the daily quota. At the end of the trading day on January 23, 2015, the closing balance for Northbound trading came in at 96 percent of the daily quota. For the December 2014 statistics, please visit

Despite a slow start, Stock Connect will continue to offer exciting opportunities to foreign investors. There are discussions in the market about similar links with other Chinese stock exchanges, such as the Shenzhen Stock Exchange. Market participants anticipate that the scheme will create sufficient market access and expedite the inclusion of Chinese securities on global indexes such as MSCI and FTSE. 

In the long run, it is believed that Stock Connect will provide China with a controlled mechanism to open up its equity capital markets, paving the way for the further opening up of China’s capital account and internationalization of the Renminbi.