Shanghai-HK Stock Connect: All you need to know

All you need to know before getting on the "through train"

Later this month, a "through train" linking Shanghai and Hong Kong stock markets will roll out, granting overseas investors with greater access to A shares as well as diversifying investment choices domestically.

Here are five things you need to know before getting on the "train":

1) What it is?

The "through train", also known as Shanghai-Hong Kong Stock Connect, was announced by Chinese Premier Li Keqiang in April. The scheme will allow international investors, institutional and retail, to trade Shanghai-listed stocks via Hong Kong Exchange while Hong Kong H shares will be eligible for trading to Chinese mainland investors.

Prior to the program, a direct access to A shares is only limited to domestic investors and qualified foreign institutional investors with authorized quota.

2) Who are eligible investors?

For north bound, all Hong Kong and overseas investors will be allowed to participate in the Shanghai-Hong Kong Stock Connect. They will be able to trade constituent stocks of Shanghai Stock Exchange 180 Index and SSE 380 Index as well as shares that are dual listed in the two bourses (A+H shares).

For south bound, eligible participants will include mainland institutional investors and those individual investors who hold an aggregate balance of not less than 500,000 yuan in their securities and cash accounts. They will be able to trade constituent stocks of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index as well as shares that are dual listed in the two bourses (A+H shares).

Interested brokers need to upgrade their IT system and pass the market readiness test before offering brokerages service to "through train" participants.

3) Market reaction:

Shanghai Composite Index has rallied more than 12 percent since April 10 when watchdogs of both sides announced the approval of the market link, while Hong Kong's benchmark Hang Seng Index hit six-year highs in earlier September.

4) What it means?

As concluded by the Hong Kong Stock Exchange, the scheme creates for the first time a feasible, controllable and expandable channel for mutual market access between the Chinese mainland and Hong Kong by a broad range of investors, paving the way for further opening up of China's capital account and renminbi internationalization.

5) Major challenges:

Quota restriction is believed to limit the effectiveness of the Shanghai-Hong Kong Stock Connect as under the current scheme, overseas investors can only invest a net value of as much as 300 billion yuan in A shares with a daily cap at 13 billion yuan, while mainland investors can only invest a net value of as much as 250 billion yuan in Hong Kong stocks with a daily cap at 10.5 billion yuan.

Both the aggregate quota and the daily quota will apply on a "net buy" basis.

International investors are also concerned about the difference in terms of regulatory environment. Therefore, according to a joint announcement, the China Securities Regulatory Commission and Securities and Futures Commission of Hong Kong will establish a dedicated liaison mechanism for Shanghai-Hong Kong Stock Connect and enhance cross-boundary regulatory and enforcement cooperation.