All aboard the through train: Shanghai-Hong Kong stock connect April 2014
Published 25 April 2014
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0.1 THROUGH TRAIN PULLS INTO HONG KONG AT LAST
On 10 April, Premier Li Keqiang told the Bo’ao Forum that China “will actively create conditions to establish a Shanghai-Hong Kong stock exchanges connectivity mechanism, and further promote two-way opening-up and healthy development of the capital markets on the mainland and Hong Kong”. He positioned the announcement as part of China’s opening up to international markets.
The “through train” – known in its current form as the Shanghai-Hong Kong Stock Connect (SHKSC) - was first floated in 2007, before the global financial crisis and China’s slowdown caused it to be shelved. Details of how it will operate are emerging. The scheme will have constraints: quotas of RMB300bn into Shanghai (daily quota of RMB13bn) and RMB250bn into HK (daily quota RMB10.5bn); only a small proportion of stocks are eligible; and investors need to conduct cross-border trades with brokerages in the opposite market.
On implementation, many details remain unclear: tax treatment; which regulatory regime will apply; how quotas will be monitored/allocated; how flexible quotas will be if economic conditions cause stocks from one exchange to be dumped in favour of another.
0.2 WIDE REACHING IMPLICATIONS
Despite questions on the detail, analysts agree that SHKSC is a significant development for opening China’s capital account.
On capital flows, the quotas are relatively large compared to other similar schemes (e.g. London’s RQFII quota is RMB80bn); and the scale of the scheme is even larger than these quotas suggest. The quotas are ‘net’, meaning that larger volumes of trading will be permissible so long as the net inflow or outflow does not exceed daily or total limits. This will create another route to channel capital in and out of China, complementing existing institutional investor schemes. It should deepen and mature the RMB offshore market, incentivising banks in both centres to develop more complex products.
Looking longer-term if this pilot works, analysts assess it will open the door to further schemes. It could lead to similar connections with other exchanges; e.g. Li Keqiang suggested a link could be established between Hong Kong/Shenzhen. The model may be extended to other areas, (e.g. commodities through the HKEx-owned London Metal Exchange, or the bond market).
The scheme offers a boost at a good time for both exchanges. Shanghai has stagnated following sharp falls in the first half of 2013 (trading 65% below its 2007 high) and the Hang Seng Index has been the 2nd worst performing exchange among developed markets this year.
The Hong Kong Government has welcomed the announcement. Chief Executive (PM-equivalent) C Y Leung said it “will not only help strengthen the two securities markets, but will also have long-term and strategic significance. It will reinforce and enhance Hong Kong’s position as the premier international financial centre and offshore Renminbi business centre”. Businesses have also reacted positively - Standard Chartered’s Hong Kong and China CEO Ben Hung described SHKSC as “a significant step…to quench the thirst of investors for Chinese assets”. The Hang Seng Index rose 1.4% in response to the announcement.
0.3 Disclaimer
The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.