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[HONG KONG] The Hong Kong stock exchange has rebuffed claims that its landmark Shanghai trading link is being hampered by overseas regulatory hurdles, amid growing pressure to address investor protection concerns that have dampened trading volumes.
The Hong Kong Exchanges and Clearing said in a statement late on Tuesday evening it has been working with overseas investors and regulators to familiarise them with the mechanics of the Hong Kong-Shanghai Stock Connect. Launched on Nov. 17, the link allows foreign investors to directly trade Shanghai shares via the Hong Kong exchange for the first time. "Relevant overseas regulators have gained a clearer and better understanding of Stock Connect. HKEx understands that they do not have particular concerns," the exchange said.
The HKEx and mainland China regulators have come under pressure to address technical and legal aspects of the link that have made it difficult for US and European Union-regulated funds to participate. These include settlement rules and uncertainty over the enforceability of shareholder rights under Chinese law.
The HKEx statement followed the release of new data on Tuesday by the Hong Kong Investment Funds Association (HKIFA). The investor group said only 13 of 41 asset managers that responded to a survey indicated they had invested through Hong Kong-Shanghai Stock Connect. "In general, we had a positive response from our members on the potential opportunities of using Stock Connect in the long term," Bruno Lee, chairman of the HKIFA told a news conference in Hong Kong on Tuesday. "But we do need more details before firms can fully leverage the scheme." The HKIFA said a key concern cited by funds was uncertainty over whether investors are assured legal entitlement to Shanghai shares held on their behalf by the HKEx's clearing house.
Shares and bonds bought by mutual funds are typically held by custodians on behalf of the investor, a concept known as beneficial ownership. Industry insiders say legal opinion is divided over whether investors could enforce their rights to shares held under beneficial ownership in China, should the HKEx's clearing house go bust.
On Tuesday, HKEx reassured investors they retain ownership rights under such circumstances. "We understand that the market needs time to get used to the idea of beneficial ownership...in the context of mainland law,"said Christine Wong, HKEx's Chief Counsel and Head of Legal Services state in the statement. "We are committed to making this and other concepts adopted in Stock Connect properly understood by investors and other stakeholders."