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Hong Kong, Shanghai In Stock Market Pilot

by Mary Swire, Lowtax.net, Hong Kong
14 April, 2014

Following its prior disclosure by Chinese Premier Li Keqiang at the Boao Asia Forum on April 10, Hong Kong welcomed China's decision to allow mutual stock market access between Hong Kong and Shanghai, implementing the opening up of the capital markets between the two sides.

Following Li's announcement, the China Securities Regulatory Commission (CSRC) and Hong Kong's Securities and Futures Commission (SFC) stated that they had approved, in principle, the development of Shanghai-Hong Kong Stock Connect (SHKSC), a pilot program for establishing stock market trading links, through local securities firms or brokers, between Shanghai and Hong Kong.

The pilot program will allow Mainland investors, who satisfy the eligibility criteria, to trade for the first time eligible stocks listed on the Stock Exchange of Hong Kong (SEHK) directly through the Shanghai Stock Exchange (SSE). At the same time, it will also allow Hong Kong and overseas investors to trade for the first time eligible stocks listed on the SSE directly through the SEHK.

The establishment of SHKSC follows the decision made at the Third Plenary Session of the 18th China Central Committee to enhance the two-way opening up of the Mainland's capital market, and to expand co-operation with Hong Kong. The preparatory work to launch SHKSC will take approximately six months.

Hong Kong's Financial Secretary, John Tsang, said: "SHKSC will connect the Hong Kong and Shanghai securities markets. It will not only help strengthen the two securities markets, but will also have long-term and strategic significance. I am pleased to see that Hong Kong plays an important role in the two-way opening up of the Mainland's capital market to the world, whilst reinforcing and enhancing Hong Kong's position as the premier international financial center and offshore RMB business center."

C Y Leung, Hong Kong's Chief Executive, added that SHKSC will be "very meaningful for both Hong Kong and Shanghai, and that is why, I believe, the Premier chose the occasion of the Boao Asia Forum to announce it himself. It underlines the role that Hong Kong plays as an international financial center amongst all cities in the country, and it also signifies the ongoing contribution that Hong Kong can contribute to the ongoing reform and opening up of the Chinese economy."

Initially, under SHKSC, all Mainland institutional investors and eligible individual investors – those individuals who hold an aggregate balance of not less than RMB500,000 (USD80,450) in their securities and cash accounts – will be accepted to trade eligible stocks listed on the SEHK directly through the SSE. At the same time, all Hong Kong and overseas institutional and individual investors will be accepted to trade eligible stocks listed on the SSE directly through the SEHK.

As SHKSC is a pilot program, it will be implemented in a progressive manner and under risk control, with cross-border investment therefore being subject to quotas. The buying of SEHK securities by Mainland investors will be capped at an aggregate quota of RMB250bn and a daily net quota of RMB10.5bn. The buying of SSE securities by Hong Kong and overseas investors will be capped at an aggregate quota of RMB300bn and a daily net quota of RMB13bn. These quotas will be subject to adjustment in accordance with actual operational circumstances.

Under the program, shares eligible to be traded in Hong Kong will comprise all the constituents of the SSE 180 Index and SSE 380 Index, and shares of all SSE-listed companies which have issued both A shares and H shares. Shares eligible to be traded in Shanghai will comprise all the constituents of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index, and the shares of all companies listed on both SSE and SEHK.

SHKSC will be founded on the existing rules and regulations and operational models governing trading and clearing in each market. For example, trading and clearing arrangements will be subject to the regulations and operational rules of the market where trading and clearing take place. Listed companies will continue to be subject only to the listing and other rules and regulations of the markets where they are listed.

Both the CSRC and the SFC will actively enhance their cross-boundary regulatory and enforcement cooperation. It was said that each of them will take all necessary measures to establish, in the interests of investor protection, an effective regime under SHKSC to respond to all misconduct in either or both markets on a timely basis.

Tsang looked on the program as a "mutually beneficial development. For the Mainland, SHKSC will help increase the participation of institutional investors in the Shanghai securities market, which will promote the further development of the market in a step-by-step manner, enable Mainland investors to invest in overseas markets in an orderly way, enhance the opening up of the Mainland's capital market and promote RMB internationalization. For Hong Kong, SHKSC will strengthen the strategic co-operation and interaction between the Hong Kong and the Mainland markets, catalyze the two-way RMB funds flow between the onshore and offshore markets, and further increase the liquidity of the offshore RMB market in Hong Kong."

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp

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