The Shanghai-Hong Kong Stock Connect (the “Stock Connect”), a pilot program for establishing mutual stock market access between Mainland China1 and Hong Kong, was announced2 in April 2014 by Premier Li Keqiang at the Boao Forum for Asia, and was officially launched3 in November 2014. The new cross-border investment channel enables individual investors from Hong Kong and overseas to invest (the “Northbound Trading”) directly in designated securities listed on the Shanghai Stock Exchange (the “SSE”), and domestic investors from Mainland China to invest (the “Southbound Trading”) directly in designated securities listed on the Stock Exchange of Hong Kong (the “SEHK”), through their respective local brokers for the first time.
On April 8, 2015, the market turnover of Hong Kong-listed shares reached an all-time high of HK$252.4 billion (equivalent to4 US$40.60 billion), as trading through Stock Connect surged to a record high since launch. The total market capitalization of Hong Kong-listed shares also reached a record high in history, climbing to HK$26.6 trillion5 (equivalent to US$4.28 trillion).
This eUpdate is the first part in a series of eUpdates to analyze topics related to the through-train schemes between Hong Kong and Mainland China. This eUpdate focuses on the key features of the Stock Connect, as well as the introduction of its short selling rules.
Stocks Eligible for the Northbound Trading
In the initial phase of the Stock Connect, Hong Kong and overseas investors are able to trade designated stocks listed on the SSE (the “SSE Securities”), which include all the constituent stocks of the SSE 180 Index and the SSE 380 Index, as well as all the SSE-listed A shares6 that are not included in these indices but which have corresponding H shares7 listed on the SEHK. The SSE Securities do not include the SSE-listed shares which are not traded in RMB, nor the SSE-listed shares which are included in the “risk alert board”.
Stocks Eligible for the Southbound Trading
Mainland investors are able to trade designated stocks listed on the SEHK market (the “SEHK Securities”), which include all the constituent stocks of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index, as well as all H shares that are not included in these indices but which have corresponding shares in the form of A shares listed on the SSE. The SEHK Securities do not include Hong Kong shares that are not traded in Hong Kong dollars, H shares which have corresponding shares listed and traded on any exchange in Mainland China other than the SSE (i.e., the Shenzhen Stock Exchange), nor H shares which have corresponding A shares included in the “risk alert board”.
The comprehensive lists of the eligible SSE Securities and the eligible SEHK Securities have been published on the SEHK’s website8.
Both the Northbound Trading and the Southbound Trading under the Stock Connect are subject to an aggregate quota that caps the absolute amount of cross-boundary flow of funds, together with a daily quota that limits the maximum daily net purchase value of cross-boundary trades.
Initially, the Northbound Trading is subject to an aggregate quota of RMB300 billion (equivalent to US$48.25 billion) and a daily quota of RMB13 billion (equivalent to US$2.09 billion), while the Southbound Trading is subject to an aggregate quota of RMB250 billion (equivalent to US$40.21 billion) and a daily quota of RMB10.5 billion (equivalent to US$1.69 billion).
The aggregate quota is monitored at the end of each trading day. If the balance of the aggregate quota is less than the daily quota, the stock trading will be suspended on the following trading day. However, investors can continue to sell the securities, which will then increase the balance of the aggregate quota. The stock trading will be then resumed once the balance of the aggregate quota returns to the daily quota level or above, for the following trading day.
The daily quota is monitored on a real time basis. If the balance of the daily quota drops to zero or is exceeded, new purchase orders will be rejected. Subject to the balance of the aggregate quota, purchasing service of the stock trading will be resumed on the following trading day9.
More than QDII / QFII
The Stock Connect is in various ways a furtherance of the Qualified Domestic Institutional Investor (the “QDII”) and the Qualified Foreign Institutional Investor (the “QFII”) schemes. While the QDII and the QFII schemes target merely institutional investors and are limited to Hong Kong investors, the Stock Connect is significantly wider, being open to members of the SSE, institutional investors and individual investors who satisfy certain eligibility criteria for the Southbound Trading, as well as the SEHK investors and their clients – without any restrictions – for the Northbound Trading. As discussed above, in its initial stage, the Stock Connect accepts the SSE-listed A shares and the SEHK-listed stocks, whereas the QDII, the QFII and the RMB Qualified Foreign Institutional Investor (the “RQFII”) schemes have rather different investment scope10. Also, while the quotas of the Stock Connect apply to the entire market rather than individual investors, those of the QDII, the QFII and the RQFII schemes are allocated to approved institutions, respectively.
On February 26, 2015, the SEHK announced11 that short selling of certain SSE-listed A shares would begin on March 2, 2015 pursuant to amendments to the rules of the SEHK that had been approved by the Securities and Futures Commission. The short selling of a particular stock under the Stock Connect is subject to both a daily limit and a cumulative limit.
In terms of daily limit, executed short selling orders for a particular stock may not comprise more than 1% of the total number of that stock held by all investors of the Northbound Trading as of the beginning of the trading day – this is known as the “short selling ratio limit”. That is to say, for instance, if the investors of the Northbound Trading have in total 100 million shares of a stock at the beginning of a trading day, only 1 million shares of that stock may be sold short on that day.
In addition, the cumulative limit of a stock over a period of 10 consecutive trading days may not exceed 5% of the total number of that stock held by the investors of the Northbound Trading as of the beginning of the trading day. That is to say, for instance, if over the previous 9 consecutive trading days the cumulative short selling ratio totaled 4.9%, on the 10th day, merely 0.1% of the total number of that stock held by the investors of the Northbound Trading as of the beginning of the trading day may be traded.
The Shanghai-Hong Kong Stock Connect provides additional investment channels for Hong Kong, overseas and Mainland Chinese investors. In addition to increasing the attractiveness of shares listed on the SEHK and the SSE, it is a key step in further opening up Mainland China's capital markets in the long run. The proposed expansion of the through-train stock cross-trading schemes, coupled with the need to promote RMB internationalization, will further facilitate the investment of offshore RMB funds in the Mainland China securities market.
1. “Mainland China” in this article refers to the geopolitical area under the jurisdiction of the PRC, excluding Hong Kong, Macau and Taiwan.
2. “Full text of Li Keqiang's speech at opening ceremony of Boao Forum”, Ministry of Foreign Affairs of the People's Republic of China, April 11, 2014: http://www.fmprc.gov.cn/mfa_eng/wjdt_665385/zyjh_665391/t1145980.shtml
3. “HKEx celebrates the launch of Shanghai-Hong Kong Stock Connect”, HKEx New Release, Hong Kong Stock Exchange, November 17, 2014.
4. Exchange rates as of April 13, 2015.
5. “Day of Records of Securities Market as Stock Connect Trading increases”, HKEx News Release, Hong Kong Stock Exchange, April 8, 2015.
6. “A shares” in this article refers to shares issued by companies incorporated in Mainland China. They are listed on the Shanghai and Shenzhen Stock Exchanges and quoted in RMB. They are not listed on the Hong Kong Stock Exchange.
7. H shares” in this article refers to shares issued by companies incorporated in Mainland China and listed on the Hong Kong Stock Exchange.
8. Lists of eligible SSE Securities and SEHK Securities can be found at: http://www.hkex.com.hk/eng/market/sec_tradinfra/chinaconnect/Eligiblestock.htm
9. The daily quota limit for the Southbound Trading was fully utilized during trading sessions on both April 8 and 9, 2015. Charles Li, the chief executive of the HKEx expected that the quotas for the Stock Connect would be increased “substantially” on April 10, 2015. However, he did not give a precise date for when the quotas would be raised.
10. For instance, RQFII can invest in (i) shares, bonds and warrants listed on stock exchanges (currently the SSE and the Shenzhen Stock Exchange), (ii) fixed-income products traded in the inter-bank bond market; (iii) securities investment funds; (iv) stock index futures; and (v) other financial instruments approved by CSRC. RQFII can also subscribe for equities in an IPO, convertible bonds, as well as a rights issue and allotment of shares.
11. “Short Selling of A shares through Stock Connect to Start on 2 March”, HKEx News Release, Hong Kong Stock Exchange, February 26, 2015.