Financial Services Quarterly Report - Third Quarter 2016: The Shenzhen–Hong Kong Stock Connect

by Dechert LLP

Dechert LLP

The official announcement of the launch of the long-awaited Shenzhen-Hong Kong Stock Connect was jointly made by the Securities and Futures Commission of Hong Kong (SFC) and the China Securities Regulatory Commission (CSRC) in August 2016. Originally expected to go “live” more than a year ago, it is now anticipated that the Shenzhen-Hong Kong Stock Connect will be operational by the end of 2016.

This cross-boundary investment channel will provide mutual stock market access between the Shenzhen Stock Exchange (SZSE) and the Stock Exchange of Hong Kong Limited (SEHK), in a manner similar to that via the existing Shanghai-Hong Kong Stock Connect.1 This new link will provide global investors with access to Mainland China’s new generation of private sector companies listed in Shenzhen, which include innovative internet and technology companies (in contrast, shares listed on the Shanghai Stock Exchange are those of primarily “large cap” state-owned enterprises). Similarly, eligible investors in Shenzhen will be able to purchase shares listed on the HKSE via their respective local securities brokers.

Key Features

Eligible Shares

Northbound Trading. Eligible shares under the Shenzhen-Hong Kong Stock Connect include: (i) constituent stocks of the SZSE Component Index and the SZSE Small/Mid Cap Innovation Index; and (ii) all SZSE-listed shares of companies that have issued both A shares and H shares.

Southbound Trading. Eligible shares include: (i) constituent stocks of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index; (ii) constituent stocks of the Hang Seng Composite SmallCap Index; and (iii) all shares of companies listed on the SEHK that have issued both A shares and H shares.

The SZSE currently has 1,798 listed stocks, whereas the Shanghai Stock Exchange only has 1,177 listed stocks. 417 Hong Kong stocks will be traded in Shenzhen, compared with the 318 Hong Kong stocks currently tradable via the Shanghai-Hong Kong Stock Connect. Global investors will be able to trade 880 Shenzhen-listed stocks that are components of major local indexes.

However, the Shenzhen-Hong Kong Stock Connect (unlike the current Shanghai-Hong Kong Stock Connect) restricts investors who are eligible to trade shares that are listed on the ChiNext Board of SZSE to “institutional professional investors” (as such term is defined in the Hong Kong Securities and Futures Ordinance2).3 In the future, other categories of investors may be allowed to trade via the Shenzhen-Hong Kong Stock Connect, “subject to the resolution of related regulatory issues”.

To provide greater investment opportunities for both domestic and overseas investors, and given the diversity of exchange-traded funds (ETFs) available on the SEHK, ETFs will be included as “eligible securities” (whereas they are not “eligible securities” under the Shanghai-Hong Kong Stock Connect). The effective date to invest in ETFs via the Shenzhen-Hong Kong Stock Connect is to be confirmed, but is eagerly anticipated by the market given the continued popularity of ETFs in Asia.

Investment Quotas

The Shenzhen-Hong Kong Stock Connect daily quota will be RMB 13 billion (approximately US$ 2 billion) for the northbound link and RMB 10.5 billion (approximately US$ 1.5 billion) for the southbound link, which is the same as the current daily quotas applicable under the Shanghai-Hong Kong Stock Connect.

The most significant change to the operation of the Shanghai-Hong Kong Stock Connect has been the removal (which took immediate effect in August upon the announcement of the Shenzhen-Hong Kong Stock Connect) of its market-wide aggregate quota of RMB 550 billion (approximately US$ 82 billion); the aggregate quota limited new purchases via the Shanghai-Hong Kong Stock Connect whenever aggregate purchases exceeded aggregate sales by the quota amount. In practice, the aggregate quota was not relevant, as buy and sell orders generally offset each other over time. There is similarly, no aggregate quota restriction applicable to the Shenzhen-Hong Kong Stock Connect.

New Stock Issues

Currently, overseas investors cannot trade in initial public offerings on the Mainland Chinese stock exchanges and Mainland investors cannot subscribe to new stock issues in Hong Kong. It remains to be seen whether this prohibition will be retained or relaxed as regards new stock issues that will be available via the Shenzhen-Hong Kong Stock Connect.

Investor Protection

Hong Kong’s Investor Compensation Fund compensates investors (of any nationality) for any losses arising from the default of a Hong Kong-licensed entity or authorized institution in relation to traded products in Hong Kong. However, since southbound trading under either Stock Connect program will be conducted by Mainland securities brokers that are neither licensed nor regulated with the SFC, and northbound trading relates to securities that are not listed on the SEHK, investors who purchase stock via the Shenzhen-Hong Kong Stock Connect will not have the benefit of coverage under the Investor Compensation Fund.


Before the Shenzhen-Hong Kong Stock Connect becomes fully functional, the SFC and CSRC must come together to ensure that any operational issues previously faced when establishing the Shanghai-Hong Kong Stock Connect, and which may arise now in the context of the new Stock Connect program, are appropriately dealt with and resolved.

While the new Stock Connect program will facilitate access by global investors to a new pool of Mainland Chinese listed stocks (which may be of more interest to an investor than the primarily “large-cap” state-owned enterprises listed on the Shanghai Stock Exchange), it remains to be seen whether the level of usage of the new program will overtake the current levels of activity under the existing Shanghai-Hong Kong Stock Connect.


1) For further information regarding Hong Kong’s Stock Connect with Shanghai, please refer to Dechert OnPoints, The Through-Train Leaves the Station: Hong Kong-Shanghai Stock Connect Launches and Chinese Regulator Responds to Lingering Concerns over Ownership of Stock Connect Securities.

2) Cap 571, Laws of Hong Kong.

3) For further information, please refer to Dechert OnPoint, The Hong Kong Professional Investor Regime.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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