In a joint announcement on April 10, 2014 (the “Joint Announcement”), the China Securities Regulatory Commission (the “CSRC”) and the Hong Kong Securities and Futures Commission (the “SFC”) unveiled “Shanghai-Hong Kong Stock Connect” (“Stock Connect”), a pilot program to establish mutual stock market access between Mainland China and Hong Kong. Stock Connect is expected to be formally launched by October 2014.
Efforts to establish a direct cross-market trading platform are not new. In August 2007, a similar pilot program (confined to the City of Tianjin) was launched. Under this program Mainland investors were allowed to directly purchase Hong Kong stocks. Due to various reasons, including fears of a destabilizing outflow of funds into Hong Kong, the Tianjin pilot program was shelved indefinitely after a short three-month run.
Currently, the only way Mainland investors can invest in stocks listed on non-Mainland stock exchanges is through the Qualified Domestic Institutional Investor (“QDII”) program. Similarly, foreign investors do not have unlimited access to stocks listed on the Mainland stock exchanges. They are only allowed to invest in B-shares (shares of companies based in China that are traded on the Shanghai Stock Exchange in U.S. dollars or on the Shenzhen Stock exchange in Hong Kong dollars), and to obtain exposure to A-shares (shares that are traded on the two Mainland stock exchanges in Renminbi) through the Qualified Foreign Institutional Investor (“QFII”) program and the Renminbi Qualified Foreign Institutional Investor (“RQFII”) program under licenses issued by the CSRC and quotas granted by the State Administration of Foreign Exchange.
The CSRC and the SFC have also been in active discussions with the SFC to create a mutual recognition platform for locally domiciled funds in Hong Kong and Mainland China (the “Fund Mutual Recognition Program”), which, if adopted, will enable eligible funds in either market to be distributed in the other.
Principal Elements of Stock Connect
Northbound Trading Link and Southbound Trading Link
Under Stock Connect, a Northbound Trading Link and a Southbound Trading Link will be formed. Under the Northbound Trading Link, Hong Kong investors will be able to place orders to trade eligible shares listed on the Shanghai Stock Exchange, while under the Southbound Trading Link, Mainland investors will be able to place orders to trade eligible shares listed on the Stock Exchange of Hong Kong Limited (the “SEHK”).
Initially, trading through Stock Connect will be subject to a maximum aggregate cross-border investment quota of RMB 300 billion (USD 48.3 billion) in the case of the Northbound Trading Link and RMB 250 billion (USD 40.2 billion) in the case of the Southbound Trading Link, as well as a daily quota which will be monitored on a real time basis. The daily quotas have been initially set at RMB 13 billion (USD 2.1 billion) in the case of the Northbound Trading Link and RMB 10.5 billion (USD 1.7 billion) in the case of the Southbound Trading Link. Although the initial quotas under Stock Connect are not as large as the quotas granted under the other cross-border securities investment programs1, the Joint Announcement expressly provides that the initial quotas may be adjusted in future.
Initially, Mainland investors eligible to participate in the Southbound Trading Link will be limited to institutional investors and individual investors who hold an aggregate balance of not less than RMB 500,000 in their securities and cash accounts. The Joint Announcement is silent on any eligibility requirements for investors in Hong Kong.
Shares eligible for trading through the Northbound Trading Link will be all the constituents of the SSE 180 Index and SSE 380 Index, and all SSE listed companies that have issued both A shares and H shares (shares of Mainland companies that are listed on the SEHK).
Shares eligible for trading through the Southbound Trading Link will be all the constituents of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index, and all companies listed simultaneously on both SSE and SEHK.
Funds publicly traded in SSE and SEHK are currently not included among the eligible shares. We believe such funds will instead be governed by the Fund Mutual Recognition Program.
Listed companies will continue to be subject only to their local listing and other regulations. Similarly, the rules of the market where the trading and clearing activities occur will apply to those activities.
Clearing and Foreign Exchange Conversion
Cross-border clearing will be conducted through a link to be established by China Securities Depository and Clearing Corporation Limited and Hong Kong Securities Clearing Company Limited. The Joint Announcement is silent on how the RMB-Forex conversion will be conducted for such cross-border stock investments.
Stock Connect is seen as an important step in the opening up of China’s capital markets and the promotion of RMB internationalization. The impact of Stock Connect on the Mainland and Hong Kong stock exchanges and existing QDII, QFII and RQFII cross-border trading programs is also expected to be significant.
1 As of March 28, 2014, the aggregated quotas granted under QDII program, QFII program and RQFII Program are, respectively, USD 86.593 billion, USD 53.578 billion and RMB 200.5 billion (USD 32.2 billion).
1 截至2014年3月28日，QDII、QFII和RQFII计划项下已批准的总额度分别为 865.93亿美元、535.78亿美元和 2005亿元人民币（约合322亿美元）。
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Wells-Christopher
This article was originally published by Bingham McCutchen LLP.