Speaking at the Bao Forum for Asia, Xiaochuan said that investors will be able to use their local brokerage accounts to make cross-border stock trades, signaling a major opening of the Chinese stock markets.
The program “will not only help strengthen the two securities markets, but will also have long-term and strategic significance,” John Tsang, Hong Kong’s financial secretary, said in a statement. “I am pleased to see that Hong Kong plays an important role in the two-way opening up of the mainland’s capital market to the world.”
The cross-border trading would be restricted to investors and institutions whose accounts have a minimum of 500,000 yuan, or about $80,500. The combined daily trading has been capped at 23.5 billion yuan, which is equivalent to 20 percent of the trading turnover of the the two markets combined.
Many companies trade on both the bourses and because of its openness to foreign investors these shares see a premium on Hong Kong's Hang Seng Index. The immediate impact of the new policy will be to erase this premium.
Another issue that regulators will have to work out is the use of local currency to trade these shares. The proposal says that mainland investors can trade Hong Kong shares using the renminbi, China's currency. But trading in Hong Kong is carried out using the Hong Kong dollar, which is pegged to the dollar and is a freely convertible currency.
Regulations and legal systems across the border are drastically different, but regulators for both sides said that they would work together on a framework that would “respond to all misconduct in either or both markets on a timely basis.”
According to officials of the China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission, said it will take around six months to introduce a preparatory pilot program. They also said that the combined trading flows will be capped at 550 billion yuan, and regulators may adjust the quotas at a later time.
The announcement is big considering Chinese markets are largely off-limits to foreign investors. Opening up of China's markets has been a central goal of Chinese President Xi Jinping. Other initiatives include reducing China's heavy-handedness and control of bank deposit rates, currency exchange rates and the banking sector.
[Wall Street Journal]
[The New York Times]