China gave the go-ahead on Monday to a long-awaited plan to connect the Hong Kong and Shanghai stock exchanges. The programme allowing a net 23.5 billion yuan (S$4.95 billion) of daily cross-border purchases will begin on Nov 17, Chinese and Hong Kong regulators said in a joint statement after weeks of investor speculation on the start date.
Here are five things you need to know:
1. What it is
The scheme, dubbed the Shanghai-Hong Kong Stock Connect, was announced by Chinese premier Li Keqiang in April and was expected to launch in October.
It will allow anyone with a Hong Kong brokerage account to trade Shanghai 'A' shares when before only a limited number of qualified institutions were allowed to do so.
Chinese mainland investors, in exchange, will be able to trade Hong Kong 'H' shares via the Shanghai Stock Exchange for the first time.
Linking the Hong Kong and Shanghai exchanges will effectively create the world's third-largest equity market with a US$5.6 trillion (S$7.22 trillion) single market capitalisation, behind the New York Stock Exchange and NASDAQ OMX and ahead of London and Tokyo.
2. Market reaction
The plans have helped fuel rallies in the stock exchanges of both cities in recent months, led by Hong Kong Exchanges & Clearing Ltd. (HKEx), brokerages and banks. On Monday, the Shanghai Composite Index closed up 2.3 per cent and is up 22 per cent since end-April. Hong Kong's benchmark Hang Seng advanced 0.8 per cent for the day and has gained 7.3 per cent since April.
3. What it means for China
The trading link marks one of China's biggest steps toward opening up its capital account, increasing use of the yuan and turning Shanghai into an international financial center. It will give foreign investors greater access to Chinese companies, which help reduce the dependence of the world's second-largest economy on exports and infrastructure spending.
4. What are the concerns
While a link between the two major markets is a landmark development, there are still concerns in terms of actual execution as both exchanges ultimately operate in different regulatory environments, CNBC reported.
For example, China imposes a 10 per cent capital gains tax on non-resident investors buying stocks while Hong Kong does not. Also, Chinese investors must have the stocks in their accounts on the day they plan to sell, while Hong Kong investors need only transfer stocks to brokers two days after the trade. Different trading hours in the two exchanges might also hinder the scheme's efficiency.
Regulators on Monday did not address these issues but the biggest obstacle could be the curbs Beijing has placed on trading. There is a 13 billion yuan daily cap on the amount Hong Kong investors can trade in A-shares, with a 300 billion yuan total in cap. Mainland investors can trade up to 10.5 billion yuan a day or 250 billion yuan total in Hong Kong stocks.
HKEx chief Charles Li, recently tempered optimism over turnover increasing dramatically on either bourse: "We should not have high expectations unless Beijing increases the quota."
5. How it will affect Singapore
The longer-term threat for Singapore is from Hong Kong's growing role as a gateway to and from China's maturing capital markets, the Financial Times said.
The trading link will propel the development of Hong Kong's rival offshore yuan business to new heights.
It could also come to threaten Singapore's standing as Asia' largest centre for commodities trading. HKEx, which last year bought the London Metal Exchange, has previously hinted that the Stock Connect platform could, in principle, be used for trading in commodities as well.
The FT said Singapore will still be able to compete as a financial centre for several reasons such as: It is largely pollution-free, unlike Hong Kong, and has more urban green space; accommodation is cheaper here; and because the political fallout from Hong Kong's pro-democracy protests has raised doubts about whether the neutrality of its judiciary can be safeguarded.