The Stock Exchange of Hong Kong Limited (SEHK) and Hong Kong Securities Clearing Company Limited (HKSCC) signed an agreement on 4 September 2014 with the Shanghai Stock Exchange (SSE) and China Securities Depository and Clearing Corporation Limited (ChinaClear) for the establishment of Shanghai-Hong Kong Stock Connect, a scheme, initially announced in April of this year, that will allow investors with access to one market to buy and sell eligible shares listed on the other market.

How Will it Work?

SEHK and SSE will establish mutual order-routing connectivity and related technical infrastructure to enable investors of their respective markets to trade designated equity securities listed in the other’s market.

A daily quota will limit the maximum net buy value of cross-boundary trades each day.
HKSCC and ChinaClear will be responsible for the clearing, settlement and the provision of depository, nominee and other related services of the trades executed by their respective market participants and investors.

Who Can Participate?

While all Hong Kong and overseas investors will be allowed to trade SSE Securities, only institutional investors from mainland China and those individual investors who satisfy the eligibility criteria (i.e. individual investors who hold an aggregate balance of not less than RMB 500,000 in their securities and cash accounts) will be accepted to trade SEHK Securities.

Where Does it Sit Alongside the RQFII regime?

The Stock Connect trading platform is not exclusive to, but will co-exist with, other schemes such as the Qualified Domestic Institutional Investor (QDII), Qualified Foreign Institutional Investor (QFII) and the RMB Qualified Foreign Institutional Investor (RQFII) schemes. The key differences between this scheme and the current schemes are:

• In terms of eligible investors, the Shanghai-Hong Kong Stock Connect is open to SSE Members, institutional investors and individual investors who satisfy certain eligibility criteria in the Chinese mainland for Hong Kong-bound trades, and SEHK participants and any of their clients (with no restrictions imposed) for mainland-bound trades; as comparison, QDII and QFII schemes target selected institutional investors and they are not limited to investors in Hong Kong.
• In terms of eligible products for investment, Stock Connect initially accepts certain SSE listed A shares and Hong Kong listed stocks, while the QDII, QFII and RQFII schemes have a different investment scope.
• In terms of quota, the quota(s) of Stock Connect applies to the whole market rather than individual investors, while under QDII, QFII and RQFII schemes, quota is allocated to respective approved institutions.
• Cross-boundary fund flow and currency exchange under Stock Connect will be handled by HKSCC and ChinaClear, under QDII and QFII schemes it is handled by the QDII/QFII institutions.

Date of Launch

The launch of Stock Connect will not take place until the relevant trading and clearing rules and systems have been finalised, all regulatory approvals have been granted and market participants have had sufficient opportunity to configure and adapt their operational and technical systems. It is expected that this will happen before the end of the year.

Click here for a FAQ document from the HKEx website.

Contributed by Niall Crowley