Investors Guide To Understanding How The Hong Kong Stock Connect Scheme Works

This article is republished with permission from Dollars And Sense .

24-Nov    Share!

For Singaporean investors, when we think of buying China stocks, we typically think of buying those listed in Hong Kong.

That's because it's an easily accessible market to international investors with international reporting standards.

However, over the past eight years, more international fund managers in Hong Kong have been buying Mainland China A-shares directly. These are stocks listed on the Shanghai and Shenzhen stock exchanges.

They do this via the Hong Kong Stock Connect Scheme, a two-way stock trading route that links international investors with the Mainland China market and Mainland China residents with the Hong Kong Stock Exchange.

It's through this Stock Connect programme that everyday investors like us can buy China A-shares directly. Prior to this, it wasn't possible for investors to purchase A-shares given China's restrictive capital markets.

So, here's all Singapore investors need to know about the Hong Kong Stock Connect Scheme.

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First Stock Connect established in 2014

The first Stock Connect programme was launched in November 2014, connecting the Hong Kong and Shanghai Stock Exchanges.

When it initially launched, it was known as a "Through Train" and there was "Northbound" trading which meant Hong Kong and international investors buying stocks listed in Mainland China.

Meanwhile, Mainland investors buying Hong Kong-listed shares was known as "Southbound" trading.

Following the successful launch of the Hong Kong-Shanghai Stock Connect, the Hong Kong-Shenzhen Stock Connect was then launched in December 2016.

In terms of settlement and clearing, Northbound trades for both Shanghai and Shenzhen adopt the same settlement. Timetable - stock settlement is T day (the day you transact) while money settlement is T+1 day (so you'll get your money the day after you sell any A-share stocks).

Eligibility Of Northbound Stocks Via Hong Kong Stock Connect 

It's important to note that for Northbound trades, they must be settled in China's currency; the renminbi (RMB).

As for eligibility on the Hong Kong-Shanghai Stock Connect, they include the Shanghai Stock Exchange (SSE) 180 Index constituent stocks, SSE 380 constituent stocks and any A+H listed shares.

For the Shenzhen Stock Exchange (SZSE), eligible stocks include any of the constituents of the SZSE Component Index and SZSE Small/Mid Cap Innovation Index with a market capitalisation of at least RMB 6 billion (US$842 million).

Some examples of some of the largest companies available through the Stock Connect (which aren't listed anywhere else) include the world's largest battery maker, Contemporary Amperex Technology Co Ltd (SZSE: 300750), also known as "CATL", and Kweichow Moutai Co Ltd (SSE: 600519), the world's largest baijiu liquor producer.

Understanding China A-Shares Market

For investors here interested in investing directly in Mainland-listed stocks, there are a few nuances we should all be aware of.

First off are the trading hours of the Shanghai and Shenzhen markets, which are relatively short.

The morning session for both is from 9:30-11:30am. Afternoon trading resumes at 1pm but only goes on until 3pm (when the market closes).

That gives investors a total of four trading hours per day when the Shanghai and Shenzhen stock markets are fully open.

As for the tradeable days per year, the Northbound and Southbound links are closed on both the public holidays recognised in Hong Kong and Mainland China.

There are a variety of negligible fees for Northbound trading, including a handling fee, securities management fee, transfer fee and stamp duty.

However, they're all calculated as less than 0.005% of the trade, with the exception of stamp duty, which is 0.1% and only imposed on the seller.

Differences Between Hong Kong & China Markets

Finally, it's important to recognise the fact that companies incorporated and listed on Mainland China have a different securities regulator to companies listed in Hong Kong.

In China, the China Securities Regulatory Commission (CSRC) regulates all China-listed companies. Meanwhile, in Hong Kong, the Securities & Futures Commission (SFC) is the public regulator of all listed companies and is an independent statutory body.

As such, in each market, there are different disclosure requirements surrounding financial reporting. In Hong Kong, it's mandatory for companies to report financials in English as that's the official language of Hong Kong financial reporting standards.

However, a lot of the financial statements and management comments in A-share companies' reports are only in Chinese.

Another discerning factor is that Hong Kong's stock market is also dominated by institutional money.

Around 80% of market turnover in Hong Kong comes from large institutions, with the remaining 20% coming from individual retail investors.

Meanwhile, in China, the reverse is true. Around 75% of turnover in Shanghai and Shenzhen is derived from retail investors and the remaining 25% comes from institutional activity (although this share is growing).

How To Buy China A-Shares

Most brokerages in Singapore that offer Hong Kong as a tradeable market should, by default, have access to the Northbound Stock Connect scheme. This means an individual investor here who wants to invest in China A-shares directly via the Northbound Stock Connect can do so.

Dividend investors should remember that dividend payouts of A-share companies are imposed with a 10% withholding tax by the Chinese government.

Overall, with the Northbound Stock Connect scheme, it has become a lot easier for international investors to buy China A-shares directly.

However, it's important to know the ins and outs of the scheme, as well as doing your due diligence on Chinese companies, before committing any capital.

A Beginner's Investment Guide to Hong Kong-Listed China Stocks

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Contributed By: Dollars And Sense