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Shenzhen-Hong Kong Stock Connect Approved

by Mary Swire, Lowtax.net, Hong Kong
18 August, 2016

Shenzhen-Hong Kong Stock Connect, a mutual stock market access program, has received key approvals recently.

China's State Council has approved the implementation plan for Shenzhen-Hong Kong Stock Connect, and then the China Securities Regulatory Commission (CSRC) and Hong Kong's Securities and Futures Commission (SFC) issued a joint statement confirming approval of its structure in principle.

The new stock link is similar to Shanghai-Hong Kong Stock Connect, which was launched in November 2014. It will enable Mainland investors to trade stocks listed on the Hong Kong Stock Exchange (SEHK) directly through the Shenzhen Stock Exchange, and for Hong Kong and overseas investors to trade stocks listed on the Shenzhen Stock Exchange directly through the SEHK.

Situated in the Pearl River Delta region in Guangdong province and close to Hong Kong, Shenzhen's stock exchange focuses on stocks in SMEs, high-technology companies, and startup companies, and the city was seen as the logical second place from which to build greater links between stock exchanges on the Mainland and Hong Kong.

According to the joint CSRC-SFC announcement on August 16, it should take approximately four months to complete preparations for the formal launch of Shenzhen-Hong Kong Stock Connect. The launch remains subject to the finalization of all necessary regulatory approvals, market readiness, and relevant operational arrangements. A separate announcement on the commencement of the new link will be made in due course.

As it has been decided that there will be no aggregate quota under Shenzhen-Hong Kong Stock Connect, the aggregate quota under Shanghai-Hong Kong Stock Connect has been abolished with immediate effect.

In a further development the CSRC and the SFC have also reached a consensus to include exchange-traded funds as eligible securities under the new mutual market access scheme. That inclusion will occur after Shenzhen-Hong Kong Stock Connect has been in operation for a period of time and upon the satisfaction of relevant conditions.

As it has for Shanghai-Hong Kong Stock Connect, last year's signing of the fourth Protocol to the China-Hong Kong double taxation agreement should aid trading activity through the new stock link. The Protocol clarifies the conditions under which an investment fund would qualify for Hong Kong resident status, and confirms that capital gains derived by a Hong Kong resident from the sale and purchase of shares in a Mainland-listed company will be taxable only in Hong Kong (where there is no such tax).

"We look forward to launching Shenzhen-Hong Kong Stock Connect, which will be an extension of our successful mutual market access program with Shanghai, so investors in our market and the Mainland market will have an additional secure, reliable channel for investment in the other market in an environment that they're familiar with," said Hong Kong Exchanges and Clearing Limited Chief Executive Charles Li. "We also look forward to enhancing Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect with additional products in the future."

Hong Kong's Financial Secretary, John Tsang, said: "The establishment of Shenzhen-Hong Kong Stock Connect is beneficial for both sides. This will facilitate the further opening-up of the capital markets of the Mainland in a risk controlled manner and promote RMB internationalization."

"At the same time, the initiatives will enable international investors to invest more widely in the Mainland's markets through Hong Kong's markets, thereby reinforcing Hong Kong's position as an international financial center and a premier offshore RMB hub, and creating better conditions for the further development of Hong Kong's financial services sector."

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