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The China Securities Regulatory Commission （CSRC） and the Securities and Futures Commission of Hong Kong （SFC） jointly announced on April 10 that Shanghai Stock Exchange and the Stock Exchange of Hong Kong Ltd. will enable investors to trade eligible shares listed on the other’s market through local securities firms or brokers. It should take approximately six months to complete the preparation for the formal launch of Shanghai-Hong Kong Stock Connect.
That is to say， investors from the mainland will be able to trade Hong Kong-listed shares through the Shanghai market as of October， and investors from Hong Kong and foreign countries will also be able to trade Shanghailisted shares through the Hong Kong market. This is a solid step for China’s capital market to go global， a goal to which it has aspired since the early 1990s.
China has two stock exchanges， in Shanghai and Shenzhen， respectively. At a press conference on April 11， the CSRC spokesman Zhang Xiaojun said that the fact that the Shenzhen Stock Exchange is not included in the pilot program for the time being owes to the considerations related to the desire to open up China’s capital markets steadily.
Shanghai-Hong Kong Stock Connect is an important step in promoting the internationalization of China’s capital markets， for which the relevant mechanism arrangements are yet to be implemented in practice. Initially， it is more prudent to develop a pilot program operated by the Shanghai and Hong Kong exchanges. Moreover， since the gap in valuation is not sig- nificant between the Shanghai and Hong Kong markets， Shanghai-Hong Kong Stock Connect will have less impact on their respective market valuation levels， which is helpful for a smooth start for the pilot program.
Zhang elaborated that based on the pilot experience of Shanghai-Hong Kong Stock Connect， the Shenzhen and Hong Kong markets will be better positioned to independently explore various forms of partnership， including mutual stock market access， from a higher starting point.
Qi Bin， director of the CSRC’s Department of Innovative Business Supervision， said ShanghaiHong Kong Stock Connect will help reevaluate stock pricing for both locations， raise the revenue for securities companies from the brokerage business and offer a channel for overseas investors to directly invest in stocks on the Chinese mainland. In the meantime， it also opens a channel for domestic investors to invest in international corporations. Wang Yong， a macroeconomic analyst with CITIC Securities Co. Ltd.， said under the condition of capital flow control， overseas investors have to rely on the programs of qualified foreign institutional investors （QFII） and renminbi qualified foreign institutional investors （RQFII）. However， quotas for QFII and RQFII are very small. Therefore， China’s A-share market is a closed market only available for domestic investors. Shanghai-Hong Kong Stock Connect will ultimately change the participants in the A-share market where foreign investors can also trade through securities companies in Hong Kong.
Promoting the yuan
At the April 11 press conference， Zhang made it clear that Shanghai-Hong Kong Stock Connect allows only yuan as its trading currency and thus investors have to invest with yuan funding.
The joint announcement of the CSRC and SFC says Shanghai-Hong Kong Stock Connect will enable mainland investors to directly participate in the Hong Kong stock market by using yuan and expanding investment channels for offshore yuan funds， thus facilitating an orderly flow of yuan funds between the two markets. It will also help the development of Hong Kong as an offshore yuan business center and promote the yuan’s internationalization.
Zhao Xijun， vice dean of the School of Finance of Renmin University of China， said as yuan’s “going-global” process has accelerated， Hong Kong has become the world’s biggest offshore market of the yuan. But investors have few channels to invest with the offshore yuan， slowing down the process of the yuan becoming an international currency. Shanghai-Hong Kong Stock Connect is conducive to setting up a smooth channel for offshore yuan to become onshore.
However， since Hong Kong-listed shares are denominated and traded in Hong Kong dollars， how can investors directly invest in Hong Kong-listed shares with the yuan？ The CSRC says mainland investors pay yuan to mainland securities companies. The yuan they have paid will be converted into HK dollars and used for trading in Hong Kong by China Securities Depository and Clearing Corp. Ltd. （CSDC）. When they sell out Hong Kong shares， CSDC will help them to convert HK dollars into yuan and send back yuan into the investors’ mainland accounts. Hong Kong investors will follow a similar path when they trade Shanghai-listed shares， and the yuan they change into HK dollars cannot be used for other investment purposes such as real estate. Such a pattern will effectively prevent money laundering and control the risks of hot money. Moreover， since all the money exchange activities are carried out in an offshore yuan capital pool， the exchange rate for onshore yuan will not be affected.
QFII not affected
China has launched QFII， RQFII and the qualified domestic institutional investor （QDII） program with the aim of providing more cross-border investment options and enhancing the opening up of capital markets while the capital account remains not fully open in China. Shanghai-Hong Kong Stock Connect shares something with QFII， QDII and RQFII， because domestic and foreign capital can flow through these programs. But will Shanghai-Hong Kong Stock Connect affect these programs？
Zhang believed that it will have no impact. He explained that Shanghai-Hong Kong Stock Connect is quite different from QFII， QDII and RQFII in terms of mechanism arrangements. Under Shanghai-Hong Kong Stock Connect， the two exchanges act as service carriers to establish mutual market access for routing orders in order to achieve cross-market investment； while under QFII and other systems， asset management companies act as service carriers to raise funding by offering financial products to investors.
The methods of investment the two systems offer are also different. Shanghai-Hong Kong Stock Connect allows two-way investment， while QFII and others are all one-way investment.
Additionally， they use different trading currencies. Shanghai-Hong Kong Stock Connect allows only yuan as the trading currency； while QFII investors may invest with the U.S. dollar and other foreign currencies.
Furthermore， they adopt different controls for cross-border capital flow. Under ShanghaiHong Kong Stock Connect， capital flow is controlled in a closed path where proceeds from trading securities must be repatriated along the original route and cannot be retained in the local market； while under QFII and other programs， proceeds from trading securities can be retained in the local market.
Finally， Shanghai-Hong Kong Stock Connect will open an investment channel for investors of both markets， by which investors can freely choose the eligible stocks under the pilot program for direct investments； while under QFII and other programs， quota applications， investment decisions and information disclosure are all conducted by asset management companies， and investors invest indirectly in the other market without being able to freely choose the underlying assets. Zhang said Shanghai-Hong Kong Stock Connect will have better synergy with QFII， QDII， RQFII and other existing mechanisms， and will provide investors with more flexible crossborder investment options.
Regulatory cooperation
Protecting the legitimate rights and interests of the investors is the responsibility of every market， a responsibility Shanghai-Hong Kong Stock Connect will not shirk. Since it involves two markets， future cooperation between regulatory authorities of the two locations will be particularly important.
Early in 1993， the CSRC and the SFC signed a memorandum of regulatory cooperation. Based on the memorandum and the side letters， regulatory authorities of the two locations will further enter into supplemental agreements on specific cross-border regulatory issues involved in Shanghai-Hong Kong Stock Connect， which provides for specific arrangements in respect of the addressing of differences in the definition of illegal trading practices such as insider trading and market manipulation， regulatory information sharing mechanisms， referral and information exchange mechanisms concerning violations， assistance in investigation and evidence collection and cooperation for the enforcement of the relevant regulatory measures.
Zhang said that with regard to the regulation of market players， the CSRC will follow the general principle that the existing laws， rules and investors’ trading practices in the two markets should not be changed. The regulatory authority of the listing venue should be responsible for the regulation of a listed company. Local regulators where the license is granted should be responsible for the regulation of a securities company. If a securities company is engaged in cross-border trading activities on behalf of investors under Shanghai-Hong Kong Stock Connect， overseas regulators may regulate its cross-border trading activities.
Shanghai-Hongkong Stock Connect Mechanism
Shanghai-Hong Kong Stock Connect is comprised of two trading links. Under the Northbound Trading Link， investors， through Hong Kong brokers and a securities trading service company to be established by Stock Exchange of Hong Kong （SEHK）， investors can trade by routing orders to Shanghai Stock Exchange （SSE）. Under the Southbound Trading Link， investors can do the same by routing orders to SEHK through mainland securities firms and a corresponding SSE securities service company.
SSE and SEHK have set ceilings for trade quotas and eligible shares. The northbound link is limited to an aggregate quota of 300 billion yuan （$48.7 billion） and a daily quota of 13 billion yuan （$2.11 billion）， and the southbound link to an aggregate quota of 250 billion yuan （$40.58 billion） and a daily quota of 10.5 billion yuan （$1.7 billion）. Mainland investors are limited to institutional investors， and individuals who hold 500，000 yuan （$81，170） in securities and capital accounts. The number of eligible mainland investors represents 2.5-3 percent of all A-share investors.
That is to say， investors from the mainland will be able to trade Hong Kong-listed shares through the Shanghai market as of October， and investors from Hong Kong and foreign countries will also be able to trade Shanghailisted shares through the Hong Kong market. This is a solid step for China’s capital market to go global， a goal to which it has aspired since the early 1990s.
China has two stock exchanges， in Shanghai and Shenzhen， respectively. At a press conference on April 11， the CSRC spokesman Zhang Xiaojun said that the fact that the Shenzhen Stock Exchange is not included in the pilot program for the time being owes to the considerations related to the desire to open up China’s capital markets steadily.
Shanghai-Hong Kong Stock Connect is an important step in promoting the internationalization of China’s capital markets， for which the relevant mechanism arrangements are yet to be implemented in practice. Initially， it is more prudent to develop a pilot program operated by the Shanghai and Hong Kong exchanges. Moreover， since the gap in valuation is not sig- nificant between the Shanghai and Hong Kong markets， Shanghai-Hong Kong Stock Connect will have less impact on their respective market valuation levels， which is helpful for a smooth start for the pilot program.
Zhang elaborated that based on the pilot experience of Shanghai-Hong Kong Stock Connect， the Shenzhen and Hong Kong markets will be better positioned to independently explore various forms of partnership， including mutual stock market access， from a higher starting point.
Qi Bin， director of the CSRC’s Department of Innovative Business Supervision， said ShanghaiHong Kong Stock Connect will help reevaluate stock pricing for both locations， raise the revenue for securities companies from the brokerage business and offer a channel for overseas investors to directly invest in stocks on the Chinese mainland. In the meantime， it also opens a channel for domestic investors to invest in international corporations. Wang Yong， a macroeconomic analyst with CITIC Securities Co. Ltd.， said under the condition of capital flow control， overseas investors have to rely on the programs of qualified foreign institutional investors （QFII） and renminbi qualified foreign institutional investors （RQFII）. However， quotas for QFII and RQFII are very small. Therefore， China’s A-share market is a closed market only available for domestic investors. Shanghai-Hong Kong Stock Connect will ultimately change the participants in the A-share market where foreign investors can also trade through securities companies in Hong Kong.
Promoting the yuan
At the April 11 press conference， Zhang made it clear that Shanghai-Hong Kong Stock Connect allows only yuan as its trading currency and thus investors have to invest with yuan funding.
The joint announcement of the CSRC and SFC says Shanghai-Hong Kong Stock Connect will enable mainland investors to directly participate in the Hong Kong stock market by using yuan and expanding investment channels for offshore yuan funds， thus facilitating an orderly flow of yuan funds between the two markets. It will also help the development of Hong Kong as an offshore yuan business center and promote the yuan’s internationalization.
Zhao Xijun， vice dean of the School of Finance of Renmin University of China， said as yuan’s “going-global” process has accelerated， Hong Kong has become the world’s biggest offshore market of the yuan. But investors have few channels to invest with the offshore yuan， slowing down the process of the yuan becoming an international currency. Shanghai-Hong Kong Stock Connect is conducive to setting up a smooth channel for offshore yuan to become onshore.
However， since Hong Kong-listed shares are denominated and traded in Hong Kong dollars， how can investors directly invest in Hong Kong-listed shares with the yuan？ The CSRC says mainland investors pay yuan to mainland securities companies. The yuan they have paid will be converted into HK dollars and used for trading in Hong Kong by China Securities Depository and Clearing Corp. Ltd. （CSDC）. When they sell out Hong Kong shares， CSDC will help them to convert HK dollars into yuan and send back yuan into the investors’ mainland accounts. Hong Kong investors will follow a similar path when they trade Shanghai-listed shares， and the yuan they change into HK dollars cannot be used for other investment purposes such as real estate. Such a pattern will effectively prevent money laundering and control the risks of hot money. Moreover， since all the money exchange activities are carried out in an offshore yuan capital pool， the exchange rate for onshore yuan will not be affected.
QFII not affected
China has launched QFII， RQFII and the qualified domestic institutional investor （QDII） program with the aim of providing more cross-border investment options and enhancing the opening up of capital markets while the capital account remains not fully open in China. Shanghai-Hong Kong Stock Connect shares something with QFII， QDII and RQFII， because domestic and foreign capital can flow through these programs. But will Shanghai-Hong Kong Stock Connect affect these programs？
Zhang believed that it will have no impact. He explained that Shanghai-Hong Kong Stock Connect is quite different from QFII， QDII and RQFII in terms of mechanism arrangements. Under Shanghai-Hong Kong Stock Connect， the two exchanges act as service carriers to establish mutual market access for routing orders in order to achieve cross-market investment； while under QFII and other systems， asset management companies act as service carriers to raise funding by offering financial products to investors.
The methods of investment the two systems offer are also different. Shanghai-Hong Kong Stock Connect allows two-way investment， while QFII and others are all one-way investment.
Additionally， they use different trading currencies. Shanghai-Hong Kong Stock Connect allows only yuan as the trading currency； while QFII investors may invest with the U.S. dollar and other foreign currencies.
Furthermore， they adopt different controls for cross-border capital flow. Under ShanghaiHong Kong Stock Connect， capital flow is controlled in a closed path where proceeds from trading securities must be repatriated along the original route and cannot be retained in the local market； while under QFII and other programs， proceeds from trading securities can be retained in the local market.
Finally， Shanghai-Hong Kong Stock Connect will open an investment channel for investors of both markets， by which investors can freely choose the eligible stocks under the pilot program for direct investments； while under QFII and other programs， quota applications， investment decisions and information disclosure are all conducted by asset management companies， and investors invest indirectly in the other market without being able to freely choose the underlying assets. Zhang said Shanghai-Hong Kong Stock Connect will have better synergy with QFII， QDII， RQFII and other existing mechanisms， and will provide investors with more flexible crossborder investment options.
Regulatory cooperation
Protecting the legitimate rights and interests of the investors is the responsibility of every market， a responsibility Shanghai-Hong Kong Stock Connect will not shirk. Since it involves two markets， future cooperation between regulatory authorities of the two locations will be particularly important.
Early in 1993， the CSRC and the SFC signed a memorandum of regulatory cooperation. Based on the memorandum and the side letters， regulatory authorities of the two locations will further enter into supplemental agreements on specific cross-border regulatory issues involved in Shanghai-Hong Kong Stock Connect， which provides for specific arrangements in respect of the addressing of differences in the definition of illegal trading practices such as insider trading and market manipulation， regulatory information sharing mechanisms， referral and information exchange mechanisms concerning violations， assistance in investigation and evidence collection and cooperation for the enforcement of the relevant regulatory measures.
Zhang said that with regard to the regulation of market players， the CSRC will follow the general principle that the existing laws， rules and investors’ trading practices in the two markets should not be changed. The regulatory authority of the listing venue should be responsible for the regulation of a listed company. Local regulators where the license is granted should be responsible for the regulation of a securities company. If a securities company is engaged in cross-border trading activities on behalf of investors under Shanghai-Hong Kong Stock Connect， overseas regulators may regulate its cross-border trading activities.
Shanghai-Hongkong Stock Connect Mechanism
Shanghai-Hong Kong Stock Connect is comprised of two trading links. Under the Northbound Trading Link， investors， through Hong Kong brokers and a securities trading service company to be established by Stock Exchange of Hong Kong （SEHK）， investors can trade by routing orders to Shanghai Stock Exchange （SSE）. Under the Southbound Trading Link， investors can do the same by routing orders to SEHK through mainland securities firms and a corresponding SSE securities service company.
SSE and SEHK have set ceilings for trade quotas and eligible shares. The northbound link is limited to an aggregate quota of 300 billion yuan （$48.7 billion） and a daily quota of 13 billion yuan （$2.11 billion）， and the southbound link to an aggregate quota of 250 billion yuan （$40.58 billion） and a daily quota of 10.5 billion yuan （$1.7 billion）. Mainland investors are limited to institutional investors， and individuals who hold 500，000 yuan （$81，170） in securities and capital accounts. The number of eligible mainland investors represents 2.5-3 percent of all A-share investors.