6. Shanghai – Hong Kong Stock Connect: Restrictions
• Quotas:
• Traffic from Mainland – up to 250 billion yuan of shares in Hong Kong
net
• 10.5 billion RMB daily net
• Hong Kong investors can trade up to 300 billion yuan of A-shares net
• 13 billion RMB daily net
7. Current Cross-Border Investing Arrangements
QFII – Qualified Foreign Institutional Investors
• Selected foreign institutional investors are given quotas to invest in Chinese
securities
• Find list of QFII holders
• RMB 257.6 billion
QDII – Qualified Domestic Institutional Investors
• Basically mutual funds, Chinese investors can buy QDII funds that invest in
overseas (not china) securities
• USD 80.793 billion
10. What Do Experts Think People Will Buy?
Hong Kong stocks
• H shares that trade at substantial
discounts to A shares
• Large caps in Hong Kong that
aren’t available in china for
example: Tencent, Lenovo, Macau
gambling stocks
• Cheap privately owned small caps
when they are allowed to be
bought
China stocks
• Sectors unavailable in hong kong
ex:
• Defense, geographically focused
sectors, certain pharmaceuticals
• High flying Chinext (China second
board, mostly hi tech/biotech,
etc.) stocks when they are allowed
to be bought
Share price moved up immediately after the announcement in 2007. It was a pretty dramatic move. HSI moved up from 22,000 to 32,000, 10,000 points in two months.
Because of a variety of reasons, the scheme was called off.
Mostly political reasons reported/guessed
who clears trades, bank of China wanted to, but other banks also fought for it.
2) trial cities: Tianjin was rumored to be the first test city, which did not sit well with other major Chinese cities)
This will help China in its efforts to open up the capital account and promote the internalization of the RMB, while at the same time developing domestic A-share market. This is expected to enhance market liquidity for Hong Kong and Shanghai
Left chart is Shanghai Composite and Hang Sang Index, Shanghai Composite is red, Hang Sang Index is blue. Right chart is AHXAH, which tracks selection of companies that have both mainland China listed A-shares and Hong Kong listed H-shares, as well as the H-share index
One can tell that the market did not react to the news initially, but started moving up after May. Pundits have explained this positive stock price movement partly as a result investors front-running the new scheme, and partly as a result of the targeted economic stimulus that has prompted the slumping Chinese economy to resume growth
HK investor would place trade to a local broker. Broker puts order through HK exchange. As far as Shanghai is concerned, the broker is HK Exchange
Shanghai investor would place trade to a local broker. Broker puts order through Shanghai Stock Exchange. As far as Hong Kong is concerned, the broker is Shanghai Exchange
Not all stocks are eligible for trading.
Hong Kong investors can only buy SSE180, SSE380 and all stocks that are dual listed. They cannot buy shares under risk alert boards
Chinese investors can buy HSI Large Cap, HSI mid cap, dual listed stocks in Hong Kong, but cannot buy any shares that are not HKD denominated
Explain net
The quotas are aggregate measurements of the limits of fund inflow and outflow
The quota balance would equal the difference between the quota limit and the oustanding buy and sell trades
Daily quotas work in the same way, however the unused quota will not carry over into the next day. The next day’s quota will be reset to the standard level as predetermined.
Traffic from Mainland – up to 250 billion yuan of shares in Hong Kong, net 10.5 billion RMB daily net
Hong Kong investors can trade up to 300 billion yuan of A-shares net 13 billion RMB daily net
QFII and QDII can buy more than just stocks, can buy bonds as well, not restricted, whereas shanghai – hk stock connect -> limit to what you can buy
The HK-Shanghai Stock Connect program does not replace QFII and QDII.
Also can’t do (margin financing, stock borrowing, index futures) in china
Before we discuss whether what people would buy under the Shanghai-HK stock direct scheme, I want to show two depressing stock charts, especially when they are put in parallel
Shanghai has fallen a lot in the past five year. Hong Kong has largely stayed the same
US and Europe have been enjoying a bull market, with a short blip in the middle of 2011 (Eurozone crisis)
Make it look nicer
Table, etc.
Taxes: Capital gains and dividend withholding taxes in China. Currently unresolved under the QFII scheme. Many funds have allowed for the taxes, but money has not been collected
Delivery vs. Payment: to sell or buy a stock, one has to either deposit the stock a day in advance with the executing broker to sell, or have cash ready a day in advance for the broker to buy
Trading during holidays: Essentially one cannot trade Shanghai on a Hong Kong holiday even when Shanghai is in session and vice versa
Settlement time: Shanghai T+1 could be a problem for HK brokers, many are not equipped for it.
