Four months to go: Shenzhen-Hong Kong Stock Connect

On Tuesday (16 August 2016), the Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC) announced the approval of the eagerly-awaited Shenzhen-Hong Kong Stock Connect (the Scheme), which would consist of the northbound and southbound trading links respectively, allowing investors access to the Shenzhen Stock Exchange from Hong Kong, and vice versa. It is anticipated that the Scheme will officially launch within four months.

There will be no aggregate quota for the Scheme, and at the same time, the aggregate quota for the Shanghai-Hong Kong Stock Connect (SH-HK Connect) launched in late 2014 will also be abolished. There will, however, be daily quotas of RMB13 billion and RMB10.5 billion for northbound and southbound investments respectively, the same as the quota size for the SH-HK Connect.

Under the Scheme, there will be 880 Shenzhen-listed stocks eligible for foreign investment. These include constituent stocks of the SZSE Component Index and SZSE Small / Mid Cap Innovation Index which has market capitalisations of at least RMB6 billion. Southbound investors can invest in 417 Hong Kong stocks including constituent stocks of the Hang Seng Composite Large Cap Index and Hang Seng Composite Mid Cap Index, any constituent stocks of the Hang Seng Composite Small Cap Index which has a market capitalisation of at least HKD5 billion. For both trading links, investors will have access to companies listed on the Hong Kong or Shenzhen Stock Exchange which have issued A shares and H shares.

Unlike the SH-HK Connect, at launch, the Scheme only allows professional institutional investors to participate in northbound investments in the Shenzhen ChiNext. For the Scheme’s and SH-HK Connect’s southbound trading links, an investor must have at least RMB500,000 in cash and/or securities in order to qualify.

Another noticeable difference between the eligible investments under the two stock connect schemes is that companies listed on the Shanghai Stock Exchange are mainly “large cap” state-owned enterprises that are also listed on the Hong Kong Stock Exchange. Whereas companies listed on the Shenzhen Stock Exchange are mainly companies with smaller market capitalisation from the high tech sector or start-up type companies.

The initial feedback on the Scheme has been positive and it is believed that the Scheme symbolises the further opening of the Mainland capital market and perhaps a closer step towards the admission of China A shares to the emerging market indices of MSCI.

The CSRC and the SFC have also reached a consensus to include exchange-traded funds (ETFs) as eligible securities under the Scheme, which will be launched after the Scheme has been in operation for a period of time and upon the satisfaction of relevant conditions. At present ETFs listed on the Hong Kong Stock Exchange are not available for southbound investors (and vice versa). This is expected to allow southbound investors a wider spectrum of investment choices, given the diversity of ETFs available in the Hong Kong market.

The announcement on the Scheme is generally welcomed as a further step towards enhancing Hong Kong’s role as an offshore Renminbi centre.

For more details, please see the announcement by the Hong Kong Stock Exchange:

http://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/Documents/160816news.pdf

As well as the joint announcement by the SFC and CSRC:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR80

Key Contacts

Alwyn Li

Partner | Financial Services

Email or call +852 2825 9627