Other BriefingsMainland China and Hong Kong to Expand their Stock Connect Scheme
China is proposing to expand its Stock Connect programs with Hong Kong to widen both its Northbound and Southbound trading lines.
On December 19, 2022, the China Securities Regulatory Commission (CSRC) and the Hong Kong Securities and Futures Commission (SFC) jointly announced their plan to further expand the scope of eligible stocks under the mainland China-Hong Kong Stock Connect scheme.
Prior to this announcement, the CSRC stated that it would collaborate with the SFC to broaden the definition of eligible stocks under Stock Connect to include eligible foreign companies primarily listed in Hong Kong as well as additional A shares listed on the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE).
With support from the two regulators – CSRC and SFC – the SSE, SZSE, Stock Exchange of Hong Kong Limited, China Securities Depository and Clearing Corporation Limited (ChinaClear), and Hong Kong Securities Clearing Company Limited are agreed on a general proposal to broaden the range of eligible stocks under the scheme.
Below we provide an overview of the mainland China-Hong Kong Stock Connect programs and what the new proposal means for foreign investors and companies.
Background: What are the mainland China-Hong Kong Stock Connect programs?
The mainland China-Hong Kong Stock Connect is a trading platform that enables domestic mainland Chinese stock exchanges to accept shares from international investors and vice versa. It is part of a series of other “connects” linking up mainland China and Hong Kong. The program includes two independent trading lines: the Shanghai-Hong Kong Stock Connect, linking the Hong Kong Stock Exchange to the Shanghai Stock Exchange, and the Shenzhen-Hong Kong Stock Connect, linking the Hong Kong Stock Exchange to the Shenzhen Stock Exchange.
Shanghai-Hong Kong Stock Connect
The Shanghai-Hong Kong Stock Connect was officially introduced on November 17, 2014, as a pilot project to enable mutual stock market access between mainland China and Hong Kong. It was created by HKEx, ChinaClear, and the SSE. The cross-border investment channel created mutual stock market access between the two locations, enabling investors from the mainland to invest directly in selected securities listed on the HKEx and vice versa. The program established a two-way trading link between the SSE and the Stock Exchange of Hong Kong Limited, a wholly-owned subsidiary of HKEx. Under specific daily quota restrictions, the stock link enables qualified mainland China investors to access eligible Hong Kong shares and Hong Kong and foreign investors to trade eligible A shares.
The mechanism involves Northbound Trading and Southbound Trading.
- Northbound Trading: With Northbound Trading, investors can trade eligible shares listed on SSE by routing orders to SSE through their local brokers and a securities trading service firm created by SEHK.
- Southbound Trading: With Southbound Trading, qualified investors can trade eligible shares listed on SEHK by routing orders to SEHK through Mainland securities companies and a securities trading service business created by SSE.
| Key Features of Shanghai-Hong Kong Connect (Prior to the Expansion) | ||
| Northbound Trading | Southbound Trading | |
| Qualification | Local and overseas investors are allowed to trade
(STAR stocks only be traded by institutional professional investors) |
Institutional investors or holders of personal accounts with a minimum of RMB 500,000 |
| Investment Products | Constituents of the SSE 180 Index
SSE 380 Index A-shares with corresponding H shares listed on SEHK |
Constituents of the Hang Seng Composite LargeCap Index, Hang Seng Composite MidCap index, H-shares with corresponding A-shares listed on SSE |
| Ineligible Products | SSE-listed shares which are not traded in RMB
SSE-listed shares which are under risk alert |
Local shares that are not traded in HKD
H shares with correspondent A- shares tradable on Shenzhen Stock Exchange H shares which have corresponding A shares put under risk alert |
| Source: Hong Kong Stock Exchange, Shenzhen Stock Exchange, Shanghai Stock Exchange, AAStocks | ||
Shenzhen-Hong Kong Stock Connect
The Shenzhen-Hong Kong Stock Connect was introduced as a secondary trading channel after the Shanghai-Hong Kong one. Under the scheme, shareholders in each market gain access to exchange shares through their regional brokers and clearing firms. First announced on August 16, 2016, by Chinese Premier Li Keqiang, the program made its debut on December 5, 2016.
The mechanism is divided into Northbound Trading and Southbound Trading:
- Northbound Trading: With Northbound Trading, investors can trade eligible shares listed on the SZSE by routing orders to the SZSE through their local brokers and a securities trading service firm created by SEHK.
- Southbound Trading: With Southbound Trading, investors will be able to trade eligible shares listed on SEHK by routing orders to SEHK through mainland securities companies and a securities trading service business created by SZSE.
| Key Features of Shenzhen-Hong Kong Connect (Prior to the Expansion) | ||
| Northbound Trading | Southbound Trading | |
| Qualification | Local and overseas investors are allowed to trade
(ChiNext is only open to institutional professional investors) |
Institutional investors or holders of personal accounts with a minimum of RMB 500,000 |
| Investment Products | Constituents of the SZSE Component Index, and SZSE Small/Mid Cap Innovation Index (with a market capitalization of at least RMB 6 Billion)
A shares of SZSE-SEHK A+H |
Constituents of HS Comp LargeCap Index, HS Comp MidCap Index, HS Comp Small Cap Index (with market capitalization at least HK$5 Billion)
H-shares of SSE-SEHK A+H H-shares of SZSE-SEHK A+H |
| Ineligible Products | SZSE-listed shares which are not traded in RMB
SZSE-listed shares which are under risk alert |
Local shares that are not traded in HKD
H shares which have corresponding shares listed and traded on any exchange in mainland China other than SSE/SZSE H shares which have corresponding A shares put under risk alert or delisting arrangement |
| Source: Hong Kong Stock Exchange, Shenzhen Stock Exchange, Shanghai Stock Exchange, AAStocks | ||
Who can participate in the mainland China-Hong Kong Stock Connect? (Prior to the expansion)
All investors from Hong Kong and abroad are permitted to trade SSE Securities via the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect. On the other hand, only Mainland institutional investors and those individuals who meet the eligibility requirements (with an aggregate balance of not less than RMB 500,000 (US$67,343.47) in their securities and cash accounts) would be allowed to participate in the trading activity.
In addition, all Exchange Participants (EPs), SSE Members, HKSCC’s Clearing Participants (CPs), and ChinaClear Participants can use the Shanghai-Hong Kong line once they meet the requirements and standards as established by the relevant exchange and/or clearing house. For further information, please refer to the complete list of all qualified EPs and CPs on the HKEx website.
What is the scope of the Stock Connect expansion proposal?
The expansion of the mainland-Hong Kong Stock Connect aims at broadening the definition of qualifying equities. As per a joint statement from the CSRC and the SFC, the action is intended to “deepen mutual stock market access between the mainland and Hong Kong, and [promote] the growth of both capital markets.”
The range of eligible equities will be widened for both the Northbound and Southbound trading lines, and the authorities estimated that the planning for the increase would take three months. As a result, both trading lines will expand the range of eligible equities as follows:
- Southbound trading: The list of eligible securities will be widened to include securities of foreign corporations that are primarily listed in Hong Kong and that are either constituent securities of the Hang Seng Composite LargeCap Index or Hang Seng Composite MidCap Index or constituent securities of the Hang Seng Composite SmallCap Index with a market capitalization of HK$5 billion (US$640 million) or above. Additionally, the Hang Seng Composite SmallCap Index constituents with a market capitalization of HK$5 billion (US$640 million) or above will be added to the list of eligible stocks for Southbound Trading under the Shanghai-Hong Kong Stock Connect, aligning it with the current list of eligible stocks for Southbound Trading under the Shenzhen-Hong Kong Stock Connect.
- Northbound trading: The list of stocks that are eligible for trading in the north under Stock Connect has been expanded to include: constituent stocks of the SSE A Share Index and the SZSE Composite Index that have a market capitalization of RMB5 billion (US$714 million) or above and meet certain requirements, such as liquidity criteria and SSE/SZSE-listed stocks of companies that have issued both A-shares and H-shares.
Impact and opportunities
The latest announcement on the program mainland China-Hong Kong Stock Connect program expansion can provide international investors access to an extra 3,000 or so businesses listed in Shanghai and Shenzhen through Hong Kong. In turn, mainland investors will have the opportunity to invest in foreign firms that are listed in Hong Kong.
This is not the first time the Stock Connect has been expanded: on July 4, 2022, exchange-traded funds (ETFs) were officially included in the mainland China-Hong Kong Stock Connect, giving Chinese investors access to a variety of ETFs listed in Hong Kong as well as Hong Kong and foreign investors the ability to trade certain onshore-listed ETFs. On the Northbound and Southbound Stock Connects, respectively, there were 83 onshore and four Hong Kong-listed ETFs, with Northbound-eligible ETFs accounting for 73 percent of market capitalization and 58 percent of turnover on the Mainland China ETF market, while the Southbound eligible-eligible ETFs covered 57 percent of aggregate AUM of ETFs listed in Hong Kong. The inclusion of ETFs is noteworthy because it reflects the global trend toward passive investing, gives foreign investors access to thematic and stylistic ETF strategies in the second-largest equities market worldwide, and increases market liquidity in Hong Kong via Southbound flows.
Combining these ongoing projects with other statements released in September 2022, it can be seen that the Stock Connect scheme will continue to expand bringing about more opportunities for foreign investors, including:
- The addition of foreign companies in the Southbound Stock Connect: The announcement that Southbound Stock Connect will expand to include foreign firms might be a game-changer. It will be possible for Mainland Chinese retail investors to purchase foreign equities in Hong Kong for the first time ever, which might make Hong Kong’s listing platform more alluring to foreign issuers seeking to access the enormous pools of cash on the mainland. By the end of 2020, mainland investors owned a total of RMB 205 trillion (US$29.35 trillion) worth of financial assets. The volume is anticipated to increase by a compound annual growth rate (CAGR) of 10 percent by 2025, reaching an estimated RMB 328 trillion (US$46.96 trillion). The addition of foreign firms will give investors new choices for diversification in addition to the wide variety of already available international products at HKEx, such as the MSCI futures product suite with underlying from several countries. This promotes effective risk management and the overall soundness of the local and international financial systems.
- The addition of RMB to Stock Connect: The inclusion of RMB trading counters would make it possible for Mainland Chinese investors to trade shares of Hong Kong-listed companies in either HKD or RMB, streamlining settlement procedures and attracting more retail investors to the Southbound Stock Connect. The project can increase Hong Kong’s offshore RMB market’s liquidity and accelerate the long-term internationalization of the RMB by opening new channels for two-way cross-border RMB capital circulation. The start of the RMB counter effort will provide Hong Kong with a unique position in pushing RMB trade to the global market at a time when other IFCs are vying for RMB business.
About Us
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
- Previous Article China’s Economy in 2022: A Tumultuous Year Ending with an Optimistic Outlook
- Next Article China’s Central Economic Work Conference: Policymakers Set Sights on Growth in 2023
