Introduction
The Shanghai-Hong Kong Stock Connect (Stock Connect Scheme) is a pilot programme for establishing mutual stock market access between Mainland China and Hong Kong. According to an announcement made jointly by the Hong Kong and Chinese regulators, the Stock Connect Scheme will officially commence trading on 17 November 2014.
Launch of the Stock Connect Scheme
Background
Previously, it was anticipated by industry insiders that the Stock Connect Scheme would be launched on 27 October 2014. However, the Hong Kong Exchanges and Clearing Ltd (HKEx) issued an announcement on 26 October 2014 indicating that although the Stock Connect Scheme was technically ready to be implemented by all the relevant parties, it had not yet received approval from the Chinese regulatory authorities for its launch.
Official Launch Date Announced
On 10 November 2014, the Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC) jointly announced that the Stock Connect Scheme would formally commence trading on 17 November 2014.
On the same day, HKEx announced that, for the Stock Connect Scheme, all relevant rules and regulations had been published, all the detailed operational agreements had been executed, and all relevant approvals and authorizations had been granted by the Chinese regulatory authorities.
Some Key Outstanding Issues
Capital Gains Tax Issue
Despite the announcement of the launch date of the Stock Connect Scheme by the SFC and the CSRC, there is still no clarification from the relevant Chinese authorities as to whether capital gains tax would be levied on Hong Kong and foreign investors trading through the Stock Connect Scheme.
Under the existing tax laws in China, a 10% tax is normally levied on unrealized and realized capital gains by foreign equity investors, and a 5.6% tax is also levied on business profits. In contrast, Hong Kong does not charge capital gains tax. While historically China has not enforced the capital gains tax against investments under the QFII or RQFII programs, it is not clear if this stance also would apply to the Stock Connect Scheme.
K.C. Chan, Secretary for Financial Services and the Treasury in Hong Kong, informed reporters on November 10 2014 that the Chinese tax authorities are close to outlining taxation rules in relation to the Stock Connect Scheme, and that an announcement would be made “within a very short time”.
However, as of the date of this alert, there has been no definitive statement released from the relevant Chinese tax authorities on the capital gains tax issue.
Quota Issue
Of greater concern to those who may want to use the Stock Connect for the benefit of funds investments is the issue of quota. The initial northbound total quota is RMB300 billion (US$48.4 billion), with a daily quota of RMB14 billion (US$2.1 billion), while the initial southbound quota is RMB250 billion (US$40.72 billion), with a daily quota of RMB10.5 billion (US$1.71 billion). Once these quota limits have been reached, an investor will not be able to purchase any further securities, which for an investment manager is likely to be a key issue, particularly for funds which require liquidity and regular redemptions, such as UCITS funds. Some observers believe that, at the appropriate (for the regulators) time, these limits will be increased, but this is by no means certain.
Beneficial Ownership of Securities
The latest FAQ issued by HKEx confirms that the nominee holder of Shanghai Stock Exchange securities acquired through Stock Connect would be Hong Kong Securities Clearing Company, however, the situation is not as clear from the PRC perspective. There is doubt as to whether PRC courts would recognize the ownership interests of Hong Kong investors to enable them to take legal action against PRC entities in the case of disputes.
For a comprehensive overview and analysis of the unresolved issues in the rules and operations of the Stock Connect Scheme, please click here.
