'More details needed' about HK-Shanghai stock program

Brokerages on the Chinese mainland and in Hong Kong are preparing the staff and technology needed to launch a pilot cross-border stock trading program, but industry insiders said it's premature to predict the impact on either market until more policy details are announced.

Several brokerages said that the Shanghai Stock Exchange had asked brokerages to submit applications by Friday to participate in the pilot program. The notice told participating brokerages to finish technology and support-staff preparations before the end of July.

The Shanghai and Hong Kong exchanges announced in April the Hong Kong-Shanghai Stock Connect program, which will allow investors to trade eligible shares in each other's market. The program is expected to start in October.

"The trading mechanisms and information disclosure requirements in Hong Kong are different from Shanghai, so we have to make some adjustments. We're waiting for more details from the SSE to make arrangements," said an analyst surnamed Sun with a securities firm in Shanghai.

"There's interest from individuals and from institutional investors such as offshore funds, especially involving some special shares like Kweichou Moutai that are only listed on the A-share market," said Eliot Li, director of sales for First Shanghai Financial Holding Ltd.

Currently, Hong Kong and foreign investors interested in A shares can only buy them through the qualified foreign institutional investor program or the renminbi qualified foreign institutional investor program, which is only open to institutional investors.

Li said his firm, based in Hong Kong but possessing A-share market analysis expertise, is preparing trading systems and training professionals for the new cross-border program, also known as the "through train".

His company is also "educating" local and foreign investors about the value of some A-share listed companies.

Under the pilot program, mainland-based investors can trade as much as 10.5 billion yuan ($1.7 billion) in total of Hong Kong-listed stocks per day, via yuan accounts at mainland brokerages.

Investors from the Hong Kong would be able to trade as much as 13 billion yuan per day of shares on the Chinese mainland.

Analysts are divided on the impact of the program. Most believe that the connection of the two stock markets will broaden investment channels for domestic and offshore investors, and it may also boost the valuation of some undervalued blue chips.

But some said the impact would be limited.

The fund and securities flows will be "isolated" within the closed loop of the two settlement systems, they said.

When Hong Kong and international investors sell A shares or mainland investors sell H shares, the money will flow back to their home market bank accounts instead of staying in the selling market, which means the program won't deepen liquidity in either market.

"We believe it won't support sustainable growth in the stock market after short-term speculation," a report issued by Shenzhen-based Essence Securities Co Ltd said.

The Hang Seng China AH Premium Index, a gauge of the price difference between A shares in Shanghai and H shares in Hong Kong, closed at 94.34 on Tuesday. It stood at 97.67 on May 9, the highest close since the cross-border trading program was unveiled.

A reading of 100 shows valuations of the two markets have converged.

"Theoretically, price convergence is certain after Shanghai and Hong Kong are linked, and thus there are arbitrage opportunities.

"However, it seems investors are still reluctant to bet on prices at the current stage," said Eric Wu, an analyst with a hedge fund based in Shanghai.