Date for stock scheme fires markets
Print Edition
CHINESE shares closed at a near three-year high yesterday following the announcement of a launch date for the Shanghai-Hong Kong Stock Connect program.
The long-awaited scheme, which starts next Monday, will allow investors in Hong Kong and on China’s mainland to trade a range of stocks listed on each other’s bourses through securities firms in their own markets.
“The launch of Shanghai-Hong Kong Stock Connect on November 17 has been approved as relevant rules related to trading and clearing, quota controls and operational arrangements have been finalized,” the China Securities Regulatory Commission and the Hong Kong Securities and Futures Commission said in a joint statement.
The pilot program, which was scheduled to start last month, will for the first time allow foreign investors to trade on the Shanghai stock market without having to go through tightly controlled quota systems.
The announcement dispelled doubts about a premature end to the program, and buoyed buying sentiment in both Shanghai and Hong Kong. The Shanghai Composite Index gained 2.3 percent on the day, while the Hang Seng Index ended up 0.8 percent.
“As a milestone in the opening up of China’s capital market, the program will significantly boost foreign participation in the country’s US$3.9 trillion A-share market,” said Xia Yang, head of equities at UBS Securities.
Foreign money currently accounts for less than 2 percent of the stock market capitalization in China, compared with 30 percent-plus in many other emerging markets. With the new connecting program, however, foreign holdings of A shares are likely to rise to 9 percent of the total free-float market capitalization by the end of next year, UBS said earlier.
Since the program was unveiled in April, the Shanghai index has surged 18 percent on hopes of increased capital inflows.
Connect will allow 300 billion yuan (US$49 billion) of investment in the mainland market from Hong Kong, with a daily cap of 13 billion yuan. Mainland investment in Hong Kong stocks will be limited to 250 billion yuan and a daily cap of 10.5 billion yuan.
The program will initially be limited to 568 Shanghai-listed stocks — which account for 90 percent of the market capitalization — and 268 Hong Kong-listed shares.
The securities regulator said earlier that these constraints might later be removed once investors become more familiar with the scheme and the risks involved with cross-boundary investments.
The program is also viewed as a major step in China’s efforts to boost the internationalization of the yuan as it is expected to increase demand for the currency in Hong Kong, which is already the largest offshore hub for yuan trading.
“This marks an important milestone in the liberalization of the mainland’s capital account,” Norman Chan, chief executive of the Hong Kong Monetary Authority, said.
“The linking of the Hong Kong and Shanghai stock markets will also propel the development of offshore yuan business in Hong Kong to new heights,” he said.
One detail of the new program that has yet to be resolved, however, is the issue of tax.
The mainland imposes a 10 percent capital gains tax on all foreign investors trading local shares, though Hong Kong applies no tax at all.
Neither the mainland nor Hong Kong securities regulators clarified the issue yesterday, though it remains a concern for many foreign investors. Some have even gone as far as to say they will hold back from the program until the tax rules are settled.
Hong Kong Secretary for Financial Services and the Treasury Bureau K. C. Chan said yesterday that the tax rules have been finalized and will be released soon.
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