CSRC Released Further Details on W88优德中国官方网站 Stock Connect

On June 13, 2014, the China Securities Regulatory Commission (“CSRC”) released the final version of “Certain Provisions on W88优德中国官方网站 Stock Connect Pilot Program” (“Rules”). 

W88优德中国官方网站 Stock Connect is expected to be formally launched by October 2014, which will eventually enable investors of Mainland China and Hong Kong to trade eligible stocks listed in the other market.

Background of W88优德中国官方网站 Stock Connect

W88优德中国官方网站 Stock Connect was initially unveiled by a joint announcement by the CSRC and the Hong Kong Securities and Futures Commission (the “SFC”) (“Joint Announcement”), which represents new efforts by the regulators to establish a direct mutual market access platform between Mainland China and Hong Kong. 

In May of this year, the CSRC published the draft version of “Certain Provisions on W88优德中国官方网站 Stock Connect Pilot Program” to seek public comments. Now the Rules were issued and are currently effective. 

W88优德中国官方网站 Stock Connect, as a pilot program to provide mutual stock market access, covers both a northbound trading link (i.e. Hong Kong and overseas investors trading in Mainland China) and a southbound trading link (i.e. Mainland China investors trading in Hong Kong).  Under the northbound trading link, Hong Kong investors will be able to trade eligible stocks listed on the Shanghai Stock Exchange (“SSE”) through HK brokers, while under the southbound trading link, Mainland investors will be able to trade eligible stocks listed on the Stock Exchange of Hong Kong Limited (the “HKeX”) through Mainland brokers.

Prior to the establishment of W88优德中国官方网站 Stock Connect, the only way that Mainland China investors can invest in Hong Kong listed stocks is trading via the Qualified Domestic Institutional Investor (“QDII”) program.  Similarly, foreign investors are only allowed to invest in the Mainland China stock market either through the Qualified Foreign Institutional Investor (“QFII”) program or the Renminbi Qualified Foreign Institutional Investor (“RQFII”) program with holders of special license issued by the CSRC and quotas granted by the State Administration of Foreign Exchange, or trading B-shares.

Major Provisions of the Rules

The Rules further spelled out the duties of SSE, HKeX and their servicing affiliates on carrying out the W88优德中国官方网站 Connect facilitates.  Key provisions of the Rules are summarized below: 

Exchange Subsidiary 

Under Article 5 of the Rules, SSE and HKeX will each establish a subsidiary in the other’s location, whose principal function is to receive orders to trade in the other exchange, and route the orders onto the other exchange’s trading platform for matching and execution.  

Below is the illustration of order flow of W88优德中国官方网站 Connect trading:

Cross-border Regulatory Framework

Articles 3 and 4 of the Rules make it clear that, except otherwise provided, (i) all trading and clearing activities under W88优德中国官方网站 Stock Connect will continue to be subject to the rules of the market where the trading and clearing activities occur, (ii) all listed companies shall follow the rules and regulations of the location where it is listed, and (iii) brokers shall follow the rules and regulations promulgated by the supervisory authorities in its region. 

Nevertheless, CSRC will have a general authority to supervise all business activities of W88优德中国官方网站 Stock Connect.  The CSRC will, based on the principles of fairness, justice, and reciprocity, work together with the SFC and other relevant securities market regulators through the cooperation arrangements between regulators to protect the interests of investors.

Quotas

Under Article 12 of the Rules, a single foreign investor cannot hold more than 10 percent of the total outstanding stock of a Mainland listed company.  The maximum combined holdings of all Hong Kong and overseas investors of a single Chinese listed company will be 30 percent, excluding stocks held by overseas strategic investors.

Pursuant to the Joint Announcement of the CSRC and the SFC, trading under the W88优德中国官方网站 Stock Connect will also be initially subject to a maximum investment quota (aggregate quota), together with a daily quota.  The northbound aggregate quota is set at RMB300 billion and the southbound aggregate quota is set at RMB250 billion.  The daily quota limits the maximum net buy value each day.  The northbound daily quota is set at RMB13 billion and the southbound daily quota is set at RMB10.5 billion.

No Dark Pool Trading

Under Article 11 of the Rules, cross-border trading can only be conducted at exchanges, unless specially permitted by the CSRC.  In other words, dark pool trading will not be available for either northbound trading or southbound trading.  

Clearing and Settlement

The Rules impose the liability of clearing and settlement of the southbound trading on the China Securities Depository and Clearing Corporation Limited while that of northbound trading on the Hong Kong Securities Clearing Company Limited.  The Rules also make clear that investors shall settle with brokers in RMB for the stock trading under the W88优德中国官方网站 Stock Connect.  

Our Observation

W88优德中国官方网站 Stock Connect is a notable step in the opening up of China’s capital markets and the promotion of RMB internationalization.  However, it remains to be seen how W88优德中国官方网站 Stock Connect will stimulate the Mainland and Hong Kong stock markets and its impact on the QDII, QFII, and RQFII participants.