The CSRC today announced a pilot mutual market access scheme to be launched in approximately six months time. Hong Kong investors will be able to trade specified Shanghai stocks through local brokers and similarly, Chinese investors will be able to trade specified Hong Kong shares. The initial quota will be Rmb300 bn, with a Rmb13 bn daily trading limit for Hong Kong investors investing in Shanghai, and an initial quota of Rmb250 bn with Rmb 10.5b daily trading limit for mainland investors looking to get into the Hong Kong market. The universe of equities eligible for this scheme include HSI Large-cap & Mid-cap indices, SH180 Large-Cap & SH380 Mid-cap indices and A+H dual listed names. Mainland institutional and retail investors with over Rmb500,000 securities/cash balance can participate in Hong Kong while the details of Hong Kong investor eligibility is yet to be announced.
This represents the last capital account restriction between China and Hong Kong as the two governments agreed to mutual market access between the stock markets of Shanghai and Hong Kong. This should help Hong Kong in its quest to remain a hub for the internationalization of the Rmb. This will also have a profound effect on various equities listed in both exchanges. Firstly, this will allow various A-H spreads to normalize, particularly Chinese financials, which trade at a premium in Hong Kong. This was clearly evident in the insurance space where the Ping An Insurance H-share underperformed it's A-share listing by 10.12% and similarly the China Life H-Share underperformed it's A-Share counterpart by 4.15%. This ultimately caused the HSCEI Index to underperform other China related markets. We could expect more convergence of A+H shares in the days to come, however it is unclear that full convertibility between the separate share classes will be allowed and so full convergence may prove to be elusive. This program will also give mainland investors access to key stocks which are listed in Hong Kong and trade at better valuations to similar plays in China. For example, Tencent (700 HK) rallied 7.55% after the announcement as investors anticipate the technology giant will garner great interest from mainland investors.
Disclosure: I am long TCEHY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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