Shanghai-HK stock link to accelerate China's reforms

A stock trading program linking the Shanghai and Hong Kong exchanges will speed up reforms of China's stock markets and make them more attractive to investors at home and abroad, according to analysts.

Test trading on the Hong Kong stock market began last week for the Shanghai-Hong Kong Stock Connect, a pilot program designed to allow mutual stock market access for investors in the Chinese mainland and Hong Kong.

From Aug. 11 to Sept. 5, securities brokerages on the Chinese mainland may make simulated investments in 14 selected stocks from the Hong Kong stock exchange to test the new system, the Shanghai bourse said.

The tests include regular stock trading and clearing, trading suspension in the case of high typhoon alerts, adapting to different work day systems on the Chinese mainland and Hong Kong, and other possible conditions.

The Hong Kong stock exchange said it will conduct tests for investments in Shanghai between Aug. 23 and Sept. 13.

The program was first announced in April. A joint circular released by both bourses said there would be a six-month preparation period before official launch of the scheme.

Analysts predict that mutual trading access will be officially launched in mid-October, following technological preparation and tests of both exchanges.

The program will step up the market-oriented reform of the mainland, especially reform in the securities market, and promote the integration of mainland and Hong Kong capital markets, said Dong Dengxin, a financial and securities researcher at Wuhan University of Science and Technology.

Compared with that of Hong Kong, an important global financial center, the mainland's stock market lags behind in terms of openness to global capital, effective supervision and protection for investors.

The program will press the mainland to bring its stock markets up to international standards, with well-functioning laws and regulations, high quality of listed companies and market-oriented initial public offering (IPO) and delisting mechanisms, experts said.

The mechanism will help raise the attractiveness of China's securities market to investors both at home and overseas, according to Dong.

At present, institutional investors outside the Chinese mainland can only invest on the Shanghai and Shenzhen bourses by becoming Qualified Foreign Institutional Investors (QFII).

China launched the QFII scheme in 2002 to allow licensed foreign investors to use offshore yuan to invest in China's capital market. Currently, 229 institutions are included in the program with a combined investment quota of 150 billion U.S. dollars.

The Shanghai-Hong Kong program provides another channel for overseas investors to invest in the mainland, although trading in the initial stage will only be allowed for a portion of stocks on both bourses and below a certain trading volumes.

Under the mechanism, the upper limit for trading Shanghai-listed stocks is set at 300 billion yuan (48.76 billion U.S. dollars), while that for Hong Kong-listed shares is 250 billion yuan.

If the restrictions are lifted in the future, the program will unleash huge growth potential for the stock market in the mainland, said Xi Junyang, professor with the Shanghai University of Finance and Economics.

Dong said that the new program will also help narrow the gap between a company's stock prices in Shanghai and Hong Kong.

At present, 68 Chinese companies are listed in both Shanghai and Hong Kong, and their share prices on both bourses are often drastically different.

In the future, share prices of those companies are likely to become more similar and approach a reasonable level, according to Dong.

However, experts also warned investors against risks from different trading rules on the two bourses.

For instance, stocks in Shanghai are subject to a daily rise or fall limit of 10 percent, but those in Hong Kong can fluctuate by any amount.

"If a situation like the 2008 financial crisis were to happen again, the daily fluctuation could be very huge. Investors must carefully do basic stock research and properly control risks," said Wang Xiaojun, analyst with Cinda Securities.