On 16 August 2016, the Securities and Futures Commission of Hong Kong (“SFC”) and the China Securities Regulatory Commission (“CSRC”) made a joint announcement approving, in principle, the establishment of the Shenzhen-Hong Kong Stock Connect (“SZ-HK SC”). This will be the second cross-border stock trading scheme between China and Hong Kong after the launch of the Shanghai-Hong Kong Stock Connect (“SH-HK SC”) on 17 November 2014, and is in line with Hong Kong Stock Exchange (“HKEX”)’s strategic initiatives of expanding mutual connectivity with the Mainland.
The SZ-HK SC will primarily follow the existing model of the SH-HK SC and will be subject to the existing laws and regulations as well as operational models governing trading and clearing under the SH-HK SC. Hence, just like the SH-HK SC, there will be a Northbound Trading Link where Hong Kong and international investors will be able to trade directly in eligible shares listed on the Shenzhen Stock Exchange (“SZSE”); and a Southbound Trading Link where investors in Mainland will be able to trade eligible shares listed on HKEX. The following table summarizes the eligible shares, eligible investors and eligible investment quota of the SZ-HK Stock Connect.
|Northbound SZ-HK Trading Link||Southbound SZ-HK Trading Link|
|Eligible Shares||· Any constituent stock of the SZSE Component Index which has a market capitalization of RMB6 billion or above|
· Any constituent stock of the SZSE Small/Mid Cap Innovation Index which has a market capitalization of RMB6 billion or above
· SZSE listed shares of companies which have issued both “A” shares and “H” shares
|· Constituent stock of the Hang Seng Composite LargeCap Index|
· Constituent stock of the Hang Seng Composite MidCap Index
· Constituent stock of the Hang Seng Composite Small Cap Index which has a market capitalization of HK$5 billion or above
· Certain HKEX listed shares of companies which have issued both A and H shares
|Eligible Investors||· For A shares listed on the Main Board and the Small and Medium Enterprise Board of SZSE, Hong Kong and international investors|
· For A shares listed on the ChiNext Market of SZSE, only those Hong Kong and international investors who are institutional professional investors
|· Mainland institutional investors and those individual investors who hold an aggregate balance of not less than RMB500,000 in their securities and cash accounts.|
|Investment Quota||· Daily quota of RMB13 billion|
· No cap on the aggregate market quota imposed
|· Daily quota of RMB10.5 billion|
· No cap on the aggregate market quota imposed
Comparison between SZ-HK SC and SH-HK SC
What has changed for SH-HK Stock Connect?
The first change is the abolishment of the aggregate quota. Previously, there was a maximum cross-boundary investment quota of RMB300 billion for Northbound trades and RMB250 billion for Southbound trades. This meant that the absolute amount of fund inflows and outflows was capped according to an Aggregate Quota Balance calculated at the end of each trading day. The daily quota has also been effectively doubled, such that the daily quota for SH Northbound and Southbound trades are now the same as the quota for SZ-HK SC. All these changes are positive as they indicate that the A share market is open for investment on a large scale.
Main differences between SZ-HK SC and SH-HK SC
The first difference concerns eligible investors. At launch, SZ-HK SC only allows professional institutional investors to participate in Northbound investments in the SZ ChiNext market. This restriction is expected to ease a few months after trading in the SZ-HK SC commences. The second difference has to do with eligible investments. Companies listed on the Shanghai Stock Exchange (“SHSE”) are mainly state-owned enterprises that are also listed on the HKEX; whereas companies listed on the SZSE are mainly companies with smaller market capitalization from the high tech sector serving China’s fast-growing consumer market.
- Applicability of “home-market rules”: Investors in SZSE shares will need to observe mainland securities regulations. Investors need to be aware of this as some laws in Mainland China are more stringent. For instance, in Mainland China, there is no express “Chinese wall” defence for an insider dealing offence.
- Applicability of the Securities and Futures Ordinance (“SFO”): s.274 and s.295 of the SFO cover false trading in securities of any relevant market outside Hong Kong. As such, Hong Kong investors may commit market misconduct by manipulating Mainland securities through either the SH-HK SC or SZ-HK SC
- Daily quota: The daily quota for the SZ-HK SC and SH-HK SC will be independently monitored by SZSE and SHSE respectively and cannot be shared between each other.
- Trading suspension: The HKEX and SHSE have agreed to require simultaneous trading suspension of companies with A and H shares listed in the two markets if the company has any unpublished inside or material information or where there is a false market concern. The same will likely apply for SZ-HK SC.
Implications of the SZ-HK SC
- More financial products: The CSRC and the SFC have agreed to include exchange-traded funds as eligible securities under both the SH-HK SC and SZ-HK SC.
- Might prompt the MSCI to include A shares in its emerging markets index as early as the end of this year: The MSCI Inc. cited accessibility issues in deciding not to include mainland-listed shares in its global benchmark indexes, a blow to government efforts to raise the profile of the country’s markets. The removal of the aggregate quota in SH-HK SC and the new SZ-HK SC marks major progress in the internationalization of China’s financial market in the long run and could prompt MSCI to include A shares in its index.
- Benefit to Hong Kong investors: the capital inflow from the mainland will push up prices of Hong Kong’s small and mid-cap stocks.
The SH-HK SC and the SZ-HK SC play an important part of HKEX’s strategic plan to build an effective platform for cross-border market access and to develop a unique destination market in Hong Kong for products with both Chinese and international relevance. As many issues that the SH-HK SC faced have since been clarified by the HKEX and CSRC, the SZ-HK SC could prove to be more successful than the SH-HK SC.
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|Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.|
|Published by ONC Lawyers © 2016|