Shanghai-HK stock link may trigger capital market reform

A much-anticipated pilot project to connect stock trading in Shanghai and Hong Kong aims to open up A-shares and usher in further reform in China's capital market.

The China Securities Regulatory Commission and the Hong Kong Securities and Futures Commission announced on Monday that they had approved the launch of the pilot project to provide mutual-trading access between the Shanghai and Hong Kong bourses.

Investors will be allowed to trade eligible shares listed on either market through local securities firms or brokers from Nov. 17.

The project allows a maximum cross-border investment of 550 billion yuan (90 billion U.S. dollars) and a daily two-way quota of 23.5 billion yuan.

The capital market on the Chinese mainland is largely isolated from the rest of the world, although there is much freedom in the real economy.

Cross-border investment in the equity market is only allowed under a series of projects including qualified domestic institutional investor (QDII), qualified foreign institutional investor (QFII) and renminbi qualified foreign institutional investor (RQFII).

Domestic institutions can invest overseas via QDII and foreign capital can enter China via QFII and RQFII. All three have high thresholds and strict restrictions.

"The Shanghai-HK stock connection marks an important step in opening up the capital market," said senior finance researcher at Shanghai Jiaotong University Fei Fangyu.

"Although [it] is capped by quotas, [the project will see more] capital lured to the Chinese equity market," said chief economist with Guotaijunan Securities Lin Caiyi.

Analysts believe the real significance of the stock link is not how much money will enter the mainland but rather the possibility that the initiative may signal more opening-up and reform in China's capital market.

"The project will enhance internationalization in China's stock market and impel trading rules and investment philosophy to evolve in line with global practices," said Fei.

His remarks were shared by Shanghai Stock Exchange chief economist Hu Ruyin, who said: "The opening-up will eventually push forward reform in the capital market and rectify rules and regulations that contradict international conventions."

Stock trading under the Shanghai-HK stock connection initiative will be settled in renminbi.

"It will bolster cross-border use of the renminbi and convertibility of the Chinese currency on the capital account," said Hu.

The launch of the Shanghai-HK stock link is an important step toward completion of a long list of reform targets set in November 2013, when China promised to boost the opening-up of the capital market and speed up convertibility of renminbi on the capital account.

Despite all the benefits, experts advised authorities and investors to brace for the potential impact.

Although overseas capital is likely to reinvigorate the sluggish stock market, fluctuations will be greater with the movement of huge amounts of money, Lin warned.

"Chinese individual investors are not as mature as foreigners. Much of their investment is blind and speculative," said Xi Junyang, a senior finance expert at Shanghai University of Finance and Economics.

To address these risks, Fei said updated policies should be put in place to cushion and safeguard investors' interests.