THE Shanghai-Hong Kong Stock Connect programme will debut today, providing unprecedented access for international fund managers into the Chinese A-share market and further boosting Hong Kong as an equity platform.
The launch announced last April was originally due out at mid-October but was delayed because, according to several reports, of the student protests in Hong Kong. It will allow investors on each exchange to trade selected stocks on the other through their existing accounts.
From today, cumulative flows into China will be limited at 300 billion yuan (S$63.5 billion), just one per cent of China's total market capitalisation, with net daily flows capped at 13 billion yuan. In the other direction, total flows into Hong Kong will be limited to 250 billion yuan, which is also around one per cent of Hong Kong's market cap, and net daily flows to 10.5 billion yuan.
The programme comes as a welcome relief for many international fund managers and institutional investors whose investments in the A-share market have been constrained by the RQFII (Renminbi Qualified Foreign Institutional Investor) programme. This programme, first launched in 2003, allocates quotas to hand-picked financial institutions.
"We have seen strong interest from fund managers across the globe. We conducted a survey last September and found that our EU fund managers see themselves underexposed (to China) to what they would like ideally. Most of them would like an exposure of an average 4.5 per cent," said Stephanie Marelle, head of BNP Paribas Securities Services Hong Kong. That compares with an average of one to 3 per cent today.
Shares of companies such as Moutai, Geely or Great Wall will now be more easily accessible for international investors. On the other side, mainland investors will be able to buy into Hong Kong big caps such as Tencent.
An original plan called the stock "through train" was drafted in 2008 but was scrapped after the global financial crisis. The new programme comes as China is eager to overhaul its financial system and gradually open its capital account and internationalise its currency.
It comes on the heels of the Shanghai Free Trade Zone and now appears for Beijing the preferred route to further opening its markets rather than granting full exposure to Shanghai. An international board in Shanghai has many times been announced and then abandoned. Chinese authorities have often played the two regional financial centres against each other and had hoped to make Shanghai an international financial hub.
The People's Bank of China seems to believe that to connect the Shanghai and Hong Kong stock exchanges is an easier and safer way for capital account opening than the "direct" route of lifting capital controls, said Capital Economics in a note to clients.
Operating the Hong Kong-Shanghai Stock Connect scheme is, in a sense, a significant and decisive step in the monetary authorities' learning curve on how to manage the risks of capital account opening.
The first direct consequence will be to boost Hong Kong's profile as the main financial centre in the region. Investors and bankers anticipate a second phase which would increase exposure of mainland stocks and potentially make the linked exchanges the biggest in the world, after New York, as more liquidity flows in. Currently just Hong Kong investors can pick from more than 560 Shanghai-listed companies, only 67 of them already dual-listed.
But linking the two exchanges in just over six months did not come easy and had lawmakers and regulators scratching their heads. The mainland markets operate in a closed environment, have different rules and norms and are not known for their transparency. While most banks and brokers have been working around the clock in Hong Kong, occasional glitches are expected.
"The challenge is connecting the different legal environments and different ways of working. Yes it can become tricky," said Hugo Leung, deputy CEO of BNP Paribas Securities (Asia) Ltd.
Hong Kong banks have been scrambling to overcome hurdles including a pre-track check requirement for investors and brokers before placing orders in the A-share market. Under the present regulations, investors are required to transfer their stocks from their custodians to their brokers one day before the day when the sell trade is executed.
"That way fund managers were delivering property with no counter value," explained Ms Marelle, who said BNP worked on an integrated model to reduce risks under which the bank now offers a system to act as an investor's custodian and broker.
Only Friday evening, the regulators lifted one of the final administrative hurdles by announcing that foreign investors would be exempted from a 10 per cent capital gains tax.
"For us this is the event of the year. If you think about it, it's the very first time Chinese authorities are allowing a measure of quota not based on an individual basis. It's never been done before. The mood is a little bit like before a rocket launch," said Ms Marelle.