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Global Trustee and Fiduciary Services News and Views
| Issue 47 | 2017
15
trading service company to be established by
SEHK in Shenzhen.
• Southbound allows investors in China to
trade selected equities on the SEHK, through
their appointed mainland securities firms
and a securities-trading service company
established by SZSE in Hong Kong.
Limitations and issues
SZ-HK Stock Connect is likely to have similar
limitations to those applicable to the Shanghai-
Hong Kong Stock Connect programme. Based on
Shanghai-Hong Kong Stock Connect, these are
likely to include the following.
• Day trading is not permitted.
• No off-exchange trading is permitted. SZSE
stipulates that investors can only sell shares
that are already held in trading accounts
the previous day (i.e. T-1). This could create
a barrier to global investment managers
as it restricts their ability to react quickly
to changing market conditions. The work-
around permitted in Shanghai-Hong Kong
Stock Connect enabling participants to open
“special segregated accounts” should enable
the buy side to meet the pre-trade checks
without pre-delivery of shares.
• It is expected that SZ-HK Stock Connect will not
fully support delivery versus payment although
recent improvements to the Shanghai-Hong
Kong Stock Connect programme have reduced
broker risk considerably.
• Trading is likely to be done through a new,
dedicated SZ-HK Stock Connect gateway.
• A shares acquired through SZ-HK Stock
Connect are not fungible with A shares
acquired through the QFII or RQFII schemes.
• The questions over the extent of beneficial
ownership of shares held by Hong Kong
Securities Clearing Company (HKSCC)
remain. Notably, investors are not the
named owners of shares held by HKSCC as
nominee. However, most investors are now
satisfied with the position established by
the publication of several Q&A documents
confirming that China recognises the
features of the nominee structure. There had
been concerns about how investors could
enforce their rights where they were not the
registered holders. China has confirmed that
the nominee arrangements should work in a
way familiar to Western investors, and that
HKSCC will effectively act as a conduit for
both distributing dividends to the ultimate
shareholder and collecting and effecting
voting instructions from ultimate holders.
9
• It is likely that the same concerns over
suspension of stock trading that have applied
to Shanghai-Hong Kong Stock Connect will
also apply to SZ-HK Stock Connect. MSCI has
commented that one of the primary issues it
wishes to see addressed is a significant reduction
of the number of suspended stocks on the
Shanghai and Shenzhen exchanges. Recently,
China has clarified trading suspension policies
in respect of both exchanges — it remains to
be seen how effective the new policies are in
practice. The Shanghai Stock Exchange has
published Q&A documents discussing their new
guidelines.
10
The point of greatest interest will be
the introduction of new controls as to the length
of time stocks can be suspended in various
circumstances. The guidelines now indicate that
maximum suspension time should not exceed
between 10 days to 5 months, depending on
the trigger for the suspension, which is an
improvement to the previous position.
CIBM
China has been endeavouring for some years
to open up the CIBM to a greater array of
foreign investors.
In 2015 and, subsequently, in the spring of 2016,
China announced various changes to the rules
applicable to CIBM, which have been heralded as
finally enabling meaningful foreign investment
in CIBM.
11
A wide range of foreign institutional
investors will now be able to access the CIBM
without the requirement to undergo a lengthy
approval or licensing process. Again, it seems
safe to assume that China has taken on board
concern reported by MSCI and the industry
in general as to the administrative burden
of pre-approval requirements for activities
generally in Chinese markets.
Eligible investors
The only kind of investor eligible to participate
in CIBM without prior approval are financial
institutions and other institutional investors,
including, among others, foreign banks, insurers,
fund managers, QFIIs and RQFIIs (subject to
FX rules) and certain medium- and long-term
institutional investors such as pension funds
recognised by the PBOC.
12
When the rules setting
out eligible investors were announced earlier this
year, they were hailed in some quarters as
a milestone in the opening of access to the