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INTERNATIONAL BUSINESS

China Sets Hong Kong-Shanghai Trading Deal

By NEIL GOUGH APRIL 10, 2014

HONG KONG It was a seven-year wait, but China on Thursday finally announced a plan to allow two-way investment between the Shanghai and Hong Kong stock exchanges. For the first time, individual investors in Hong Kong will be able to use their local brokerage accounts to trade the shares of companies listed in Shanghai, the China Securities Regulatory Commission and Hong Kongs Securities and Futures Commission said in a joint announcement on Thursday. At the same time, investors in mainland China would be able to use their local brokers to buy Hong Kong-listed shares. This outbound trading would be restricted to institutions or individual investors whose accounts have a minimum of 500,000 renminbi, or about $80,000. The combined daily trading would be capped at 23.5 billion renminbi, the regulators said. That is equal to about 20 percent of the combined average daily trading turnover of both markets. Despite their size and huge trading volumes, Chinas equity and debt markets remain largely off limits to foreign investors. Current two-way investment is restricted to licensed institutions not individuals and subject to comparatively tiny quotas. The preparatory work to introduce the new pilot trading program is expected to take about six months, officials said. The cumulative, combined trading flows will be capped at an aggregate 550 billion

renminbi. The quotas may be adjusted in the future, the regulators said. The program, called the Shanghai-Hong Kong Stock Connect, will not only help strengthen the two securities markets, but will also have long-term and strategic significance, John Tsang, Hong Kongs financial secretary, said Thursday in a statement. I am pleased to see that Hong Kong plays an important role in the two-way opening up of the mainlands capital market to the world. In the summer of 2007, senior Hong Kong government officials announced a plan, referred to as the through train, that would allow mainland Chinese investors to directly buy shares listed in Hong Kong. That announcement sent the local Hang Seng Index soaring, gaining more than 50 percent over a two-month period ending in October 2007 to peak at a high of over 31,000 points. But the through train never left the station. Hong Kong stocks plunged and, unlike shares in the United States and other major markets, have not come close to matching their pre-crisis highs. Investors are hoping this time around is different. The landmark agreement gives global investors greater access to Chinas extraordinary growth story and allows Chinese savers to diversify their holdings, said Peter Wong, the deputy chairman and chief executive of HSBCs Hong Kong unit. This is further confirmation of Chinas commitment to financial reform, and reaffirms Hong Kongs role as the fulcrum of Chinas broader economic integration with the global economy. Opening up Chinas financial markets to the world is a key goal of the package of overhauls announced by President Xi Jinping after a major plenum meeting of Communist Party leaders in November. Beyond allowing greater access to Chinas stock markets, other proposals include easing the states heavy-handed control of bank deposit rates, currency exchange rates and the banking sector. But critics say China has yet to implement some of the promised liberalizations, as has been demonstrated, for example, by slow progress in

developing the countrys new or planned free trade zones.

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