HONG KONG/SHANGHAI: Norman Chan, chief executive of the Hong Kong Monetary Authority said on Monday that Hong Kong and Shanghai would link their stock exchanges on November 17.
The move will grant foreign investors unprecedented access to China’s $3.9 trillion stock market and create the world’s third-largest equity market. The long-awaited landmark stock connect project will, for the first time, allow global investors to trade Chinese stocks directly from Hong Kong, while mainland investors will be able to access the Hong Kong equities market.
The launch also forms part of China’s push to widen the use of the yuan, with Canada being singled out at the weekend as the latest trading hub for the currency. In the past two years, China has set up clearing banks in London, Singapore, Qatar and other financial hubs to help facilitate trade transactions and investment denominated in the yuan. “This marks an important milestone in the liberalisation of the mainland’s capital account,” Norman Chan, chief executive of the Hong Kong Monetary Authority said in a statement after the launch of the Stock Connect scheme.
“The linking of the Hong Kong and Shanghai stock markets will also propel the development of offshore renminbi business in Hong Kong to new heights,” he added. The offshore yuan and Chinese shares rose on the back of the announcement. Linking the Hong Kong and Shanghai stock markets will effectively create the world’s third-largest equity market with a $5.6 trillion single market capitalisation, behind the New York Stock Exchange and NASDAQ OMX and ahead of London and Tokyo, according to Allianz Global Investors.
China already operates several cross-border investment schemes, but these are restricted to specific firms that must apply for a license to participate. Stock exchanges in mainland China have seen trading volumes surge from Oct. 29 as investors positioned themselves for an imminent launch of the scheme, but the Chinese authorities pressed pause on the project at the last minute without providing an explanation for the delay. Hong Kong’s leader hinted last week the recent pro-democracy protests in the city had played a role in the postponement.
Industry participants had also said taxes were a possible sticking point: China imposes a 10 per cent capital gains tax on non-resident investors buying equities, while Hong Kong imposes no tax. Both the mainland and Hong Kong market regulators, in their statements announcing the launch, did not clarify the tax issue, but some market participants said they expected trades that take place via the scheme will be tax-exempt.
Stephen Baron of Shanghai-based investment consultancy Z-Ben, however, said this could create “complications” for asset managers already invested in schemes subject to capital gains taxes. The lack of clarity on taxes, as well as giving investors’ a week’s notice, may mean a muted start for the stocks connect link, brokers said. Investors had previously asked the regulators to give them a month’s notice before starting the scheme.
