Shanghai-Hong Kong Stock Connect: cross-boundary investment channel explained
13:42, 24 September 2021
Historically, foreign investors have found it difficult to access the Chinese equity market due to government restrictions on foreign investment. China’s world-leading growth over the past decade has heightened demand for Chinese equities as global investors look to profit from the country’s evolution into a developed economy.
International investors today can access certain equities in mainland China via the Stock Connect programme between the stock exchanges in Hong Kong, Shanghai and Shenzhen.
What is Hong Kong’s Stock Connect?
The Stock Connect programme is a cross-boundary market access that allows Hong Kong-based and global investors to trade in selected mainland China shares, and allows domestic mainland investors to buy Hong Kong stocks.
Stock Connect has two distinct routes. Shanghai Connect links bourses in Shanghai and Hong Kong. Shenzhen Connect links exchanges in Shenzhen and Hong Kong.
Each link consists of a two-way pipeline that allows eligible domestic investors in mainland China to invest in Hong Kong stocks through the Southbound trade. While Hong Kong and overseas investors access certain equities listed in Shanghai and Shenzhen via Northbound trading.
What are A-shares, B-shares and H-shares?
Before we proceed, it’s useful to know the difference between the different types of equities traded in mainland China and Hong Kong.
A-shares are shares of companies listed on the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE). They’re only quoted in China’s national currency, the renminbi (RMB). Historically, A-shares are only available for purchase to domestic mainland investors, due to China’s foreign investment restrictions.
B-shares are shares of companies listed on the SSE and SZSE. They’re denominated in RMB but settled in US dollars (USD) on SSE and in Hong Kong dollars (HKD) on SZSE. B-shares are open to offshore investors and mainland domestic investors with foreign currency accounts.
Chinese investors have limited access to B-shares, therefore, the stock of the same company can trade at much higher valuations on the A-shares market than on the B-shares market.
H-shares are shares of mainland Chinese companies listed on the Stock Exchange of Hong Kong (SEHK). H-shares are quoted in HKD.
The Stock Connect origins
The Stock Connect programme began with the introduction of the Shanghai Connect in 2014, opening up the mainland Chinese market to a broad range of investors. Following its success, the Shenzhen Connect was introduced in December 2016.
Who can trade on Stock Connect?
Hong Kong and overseas investors are allowed to trade selected securities through Shanghai and Shenzhen Connect. Whereas only institutional investors and individual investors who hold portfolios worth more than CNY500,000 ($77,300) are eligible to access Southbound trading.
How does Hong Kong Stock Connect work?
To facilitate the Stock Connect programme, the SEHK has set up subsidiaries in Shanghai and Shenzhen, whose primary function is to receive orders and execute trading in securities listed in Shanghai and Shenzhen. Similarly, exchanges of Shanghai and Shenzhen have set up units in Hong Kong to facilitate Stock Connect trade.
Shanghai, Shenzhen and Hong Kong trading hours
Northbound trading adheres to SSE and SZSE trading hours. Investors have to input Northbound orders from 09:30 to 11:30 and 13.00 to 14:57 local time in Shanghai and Shenzhen.
Southbound trading follows Hong Kong exchange trading hours. The morning trading session in Hong Kong is between 09:30 to 12:00 local time and the afternoon trading session runs from 13:00 to 16:00 local time.
Daily quota of Stock Connect scheme
Trading under the Stock Connect programme is subject to a daily quota, applied on a “net buy” basis. Selling of cross-boundary securities is not subject to the quota balance.
The Northbound daily quotas for Shanghai Connect and Shenzhen Connect are each set at RMB52bn. The Southbound daily quota is set at RMB42bn. Daily quotas are reset every day – unused daily quota is not carried to the next day. Investors can check the availability of daily quotas on the SEHK’s website.
Day trading, shareholding, and fees
Day trading is not allowed on Northbound trades, but mainland investors are allowed to conduct day trades via Southbound trade.
A single foreign investor’s shareholding in a listed company is not allowed to exceed 10% of the company’s total issued shares, according to rules set by the Chinese government.
The total foreign investor shareholding in A-shares of a listed company is not allowed to exceed 30% of issued shares.
Under Shanghai and Shenzhen Connect, Hong Kong and overseas investors will be subject to the various fees, including handling fee, securities management fee, transfer fee and stamp duty.
Recent news on Stock Connect
Hong Kong stock exchange operator HKEX in January 2021 announced the inclusion of eligible A-shares listed on the SSE’s Sci-Tech Innovation Board (STAR Market) into the Stock Connect programme.
The Shanghai STAR Market is a Nasdaq-themed index that caters mainly to high-growth tech startups from China by allowing easier listing requirements and wider price swings.
However, shares listed on STAR Market will only be accessible via Northbound Stock Connect trading to institutional professional investors, HKEX said.
In November 2020, HKEX announced an accelerated settlement platform for the Stock Connect programme, which is expected to be deployed in the first quarter of 2022.
Hong Kong stock trading: HKEX
Stock trading in Hong Kong is facilitated by the HKEX, and its Stock Connect scheme is growing in revenue contribution as well as trade volume.
HKEX in its most recent interim report said Stock Connect revenues jumped 78% from a year ago, helped by the inclusion of Shanghai’s STAR Market equities in the programme.
The Shanghai-London Stock Connect has been developed jointly by the Shanghai Stock Exchange and London Stock Exchange Group.
The Bond connect scheme in China is a mutual market access that allows investors from domestic mainland investors and foreign investors to trade in each other's bond markets through a market infrastructure linkage in Hong Kong.
Last week the Hong Kong Monetary Authority and the People’s Bank of China announced that mainland Chinese investors will be able to access Hong Kong’s $150bn bond market. Previously, only access to China from Hong Kong was allowed on the trading link.
Investing in Hong Kong and Mainland China stocks
Mainland China and Hong Kong markets have been underperforming global markets in 2021, due the Chinese government’s regulatory crackdown on the private sector. China’s President Xi Jinping has been pushing the “common prosperity” agenda, which has led to scrutiny of several sectors, including education and real estate, in a bid to bring down living costs for Chinese citizens and distribute wealth equality.
Investors foresee a significant slowdown in economic growth in China as a result of these disruptions. Hong Kong’s benchmark Hang Seng index has fallen over 11% year-to-date, as of 22 September’s close. China’s blue-chip CSI 300 index, which tracks the top 300 companies listed in Shanghai and Shenzhen, is down over 7% across the same period.
In comparison, the US benchmark S&P 500 index is up over 18% in 2021, as of 22 September’s close. India’s Nifty 50 index has jumped over 26% in the same period. Australia’s S&P/ASX 200 index has advanced over 10%.
A default crisis in one of China’s biggest property developers, China Evergrande, has further clouded investor sentiment. Many fear that Evergrande’s failure to pay off its over $300bn debt will adversely affect China’s economic growth, its financial and property sectors, and global commodities and currencies market.
If you’re not ready to invest in Chinese shares, you can still trade them with contracts for difference. Note that with contracts for difference (CFDs), you can try to benefit from the stock’s price going up or down. Open a long trade, if you believe in a positive stock price movement, or go short, if you think the price will move down.
Mind that CFDs are leveraged products, which means both profit and loss can be magnified. Make sure you understand how CFDs work, and never invest more than you can afford to lose.
Edited by Alexandra Pankratyeva
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