Shanghai-HK connection opens up possibilities for companies looking to tap demand for Chinese investors
November 17, 2014, marked the first day of trading under the Shanghai-Hong Kong Stock Connect, a platform for mutual market access which effectively opens the market for Hong Kong investors in mainland China. The Shanghai-HK Connect allows Chinese mainland investors to trade in securities listed on Hong Kong Stock Exchange (HKEx) in renminbi (RMB) through brokers members of the Shanghai Stock Exchange (SSE) and Hong Kong investors to trade in securities listed on the SSE through their brokers HKEx. Although in its infancy, the Shanghai-HK Connect is an important step in the liberalization of capital markets in China and adds to the attractiveness of Hong Kong as a place from the list of companies looking to tap demand Chinese investors.
A modest increase in trading volumes on the Stock Exchange of Hong Kong from the lows of mid-2014 was widely attributed to the imminent start of the platform, with the valuations of listed companies in Shanghai generally much higher than those of the Hong Kong listed companies and platform potentially leading to a narrowing of the gap. Even more pronounced is the increase in the average daily volume in DFS, from a minimum of US $ 9.7 billion in May 2014 and $ 40 million in November 2014.
At least initially, the scope of the Connect Shanghai-HK has limitations. China mainland, or "south", investors are only able to invest in constituent stocks of the Hang Seng Index Composite LargeCap, the Composite Index MidCap Hang Seng, and H shares of any company incorporated in the People's Republic China have shown corresponding class of shares in Shanghai - a grand total of about 270 companies that together account for about 82 percent of the total market capitalization of the HKEx and 78 percent of the average daily volume. Companies that only have a secondary listing on the HKEx, ie companies with a primary listing on a market outside China and Hong Kong, are a remarkable group excluded from the platform. Hong Kong, or "north", investors can trade in shares listed 568-SSE companies, representing approximately 90 percent of the total market capitalization of SSE and 80 percent of the average daily volume.
The platform does not extend to the subscription of shares in initial public offerings, which are often perceived as riskier, which listed on the HKEx companies will have to wait until they qualify for one of the Hang Seng index applicable to benefit platform. Chinese investors are also unable to short sell or participate in financing margin or stock borrowing or lending. In line with narrow China's foreign exchange controls, there is an initial limit of RMB250 million in the net amount of the securities listed on HKEx that can be purchased under the program by investors from mainland China values (with a cap daily net purchase of RMB10.5 million), and the corresponding aggregate quota RMB300 million in the purchase of securities listed in Shanghai by investors from Hong Kong titles. The cover aggregate RMB250 million, just over US $ 40 billion, equivalent to about turnover in the HKEx week - although sales are offset against purchases off the lid is not necessarily indicative of the overall level of turnover generated by the platform.
In addition, both northbound and southbound investors need to comply with laws governing securities markets in which they conduct business, including the requirements of applicable information in these markets. The Commission of Hong Kong and China Securities Regulatory Commission Securities and Futures have signed a memorandum of understanding to strengthen cooperation in implementation that provides, inter alia, for the exchange of information and data on potential or suspected irregularities. Non-listed Chinese SSE investors seeking to use the program to trade in securities should, therefore, ensure they are familiar with the applicable requirements.
In early 2015, shares of 268 companies listed on HKEx had been negotiated by investors to the south, with most traded stocks a mixture of major constituent stocks of HKEx and SOEs with H shares trading at significant discounts to its SSE- listed A shares. Contrary to the expectations of many who anticipate the lowest rating of the HKEx be the main appeal, northbound net purchases of listed-SSE shares for investors in Hong Kong have significantly exceeded net purchases south. As of December 26, 2014, had been used about a quarter of the share RMB300 billion net purchase of operations north, compared to only RMB10.5 million share of net purchase of operations to the south.
If the Connect Shanghai-HK is successful in its initial pilot phase, both parties have publicly stated that the platform can be expanded in terms of fees, and the securities markets. However, no timetable has not yet been set for an expansion of the platform.