2021.12.28 XIE, Qing (Natasha)、XIAO, Xian、LUO, Danchen
On December 17, 2021, the China Securities Regulatory Commission (CSRC) announced that it proposes to amend Article 13 of the Certain Provisions on W88优德手机版 between Mainland China and Hong Kong Stock Markets (“Provisions”) to exclude mainland China investors outside the scope of investors under W88优德手机版. On the same day, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) respectively released the Implementation Measures of the Shanghai Stock Exchange for Shanghai-Hong Kong W88优德手机版 (Second Amendment in 2021) (Consultation Paper) and the Implementation Measures of the Shenzhen Stock Exchange for Shenzhen-Hong Kong W88优德手机版 (Amended in December 2021)(Consultation Paper) (collectively, the “Consultation Paper”), proposing detailed rules regarding the scope of “mainland China investors”.
1. Background
According to the Statement on the Amendments to the Provisions, the CSRC has noted that in the implementation of the W88优德手机版 scheme, some mainland China investors open securities accounts in Hong Kong and trade A shares through W88优德手机版 (“Northbound Trading”). According to the CSRC, though the overall scale and trading volume of Northbound Trading by mainland investors is not significant, it is noteworthy that such investors have already opened securities accounts to directly trade A shares within mainland China, and therefore the CSRC believes that "it may give rise to concerns of violations if trading through two channels concurrently", and at the same time "it gives an impression of 'fake foreign capital' in Northbound Trading", "which is not conducive to the stable operation and future development of W88优德手机版". The CSRC decided to amend the Provisions to regulate the “round-trip” securities trading activities carried out by mainland China investors and strengthen the regulation of “fake foreign capital”. The amendments also aim to strengthen the regulation of cross-border securities trading, balance the needs for opening up and the security of the financial sector, protect the legitimate rights and interests of mainland China investors and maintain the stable operation of the W88优德手机版 scheme.
2. The Scope of “Mainland China Investors”
According to Article 13 of the Provisions, investors have the right to buy shares through W88优德手机版 in accordance with the law. Based on this, the CSRC proposes to add a clause specifying that investors who are eligible for W88优德手机版 shall not include mainland China investors, thereby mainland China investors will not be allowed to trade through Northbound Trading under W88优德手机版 anymore.
The SSE/SZSE further defines the scope of “mainland China investors” in their Consultation Paper as follows:
(1) For individual investors, this refers to Chinese citizens who hold mainland China (PRC) identification certificates, excluding PRC citizens who have obtained a non-PRC permanent residence permit. Non-PRC permanent residence permits include permanent resident cards, permanent resident visas, and other certificates issued by a non-PRC country or region.
(2) Institutional investors refer to legal persons and unincorporated organizations duly incorporated in mainland China. Non-PRC branches or subsidiaries of these mainland China incorporated legal persons and unincorporated organizations are still allowed to trade through the W88优德手机版 scheme by virtue of their non-PRC identification certificates such as a business certificate of incorporation obtained overseas.
3. Implementation Plan
Pursuant to the Consultation Paper, after the implementation of the Provisions, Hong Kong brokers shall not offer access for mainland China investors to trade through W88优德手机版. Meanwhile, it allows a one-year transition period for mainland China Investors who have already accessed trading through W88优德手机版 (“Existing Mainland China Investors”).
(1) During the transition period, existing mainland China investors may continue to buy and sell A-shares through W88优德手机版.
(2) After the transition period, existing mainland China investors may only sell A-shares through W88优德手机版. They are no longer allowed to buy A-shares through W88优德手机版, except if they acquire A-shares passively due to corporate actions such as dividend distribution and the allotment of shares. Hong Kong brokers will cancel the trading access of existing mainland China investors that don’t hold A-shares.
Our Observations
Amending the Provisions is a remarkable attempt by the CSRC to regulate W88优德手机版, particularly Northbound Trading. In 2016 and 2018, the CSRC investigated and penalized two cases where mainland China investors manipulated the A-share markets through Northbound Trading. The CSRC had already noted weaknesses in the regulation of W88优德手机版, especially the potential risk of abusing Northbound Trading.
Nevertheless, from our point of view, we should avoid over-interpreting the impact of the amendment to the W88优德手机版 scheme on other channels (such as QFII swap or W88优德手机版 swap) used by foreign investors to trade A-shares. Based on our observations, the regulator has always strived to achieve a balance between opening up, market stability and the protection of investors. Unless extreme events occur that have a far-reaching adverse impact on the market, we believe that the regulator will adopt a moderate “step-by-step” approach to resolve any problems arising in the opening up of the capital market.
