Landmark Shanghai-HK stock link kicks off

Gongs were struck in the Shanghai and Hong Kong bourses to mark the start of the Shanghai-Hong Kong Stock Connect program on Monday.

STOCK LINK LAUNCH

The initiative allows investors to trade on both bourses and is seen as a move toward a more open capital market in the Chinese mainland. The launch is expected to generate billions of dollars in cross-border transactions every day.

The Shanghai Composite Index has risen about 18 percent since China's central government announced the connection in Shanghai and Hong Kong in April.

Hong Kong-based investors will be able to buy shares in 568 Shanghai-listed companies while buyers from the mainland will have access to 266 Hong Kong-listed stocks from today.

In the first northbound deal, 8,000 shares in Cheung Kong Holdings were sold to mainland investors at 142 HK dollars (18.32 U.S. dollars) each. In the other direction, 32,700 shares in Inner Mongolia Yili Industrial Group Co. went south at a price of 26 yuan (4.3 U.S. dollars) each.

Each day, mainland investors are allowed to trade 10.5 billion yuan in Hong Kong, with Hong Kong investors operating on a 13 billion yuan limit in Shanghai. Mainland investors with over 500,000 yuan in their brokerage accounts are eligible to trade in Hong Kong while anyone with a Hong Kong brokerage account may trade shares on the Shanghai market. Previously, foreign investment in mainland equity was only allowed under a series of complex projects.

To overcome a major block in the stock connect program, China's Finance Ministry on Friday decided to exempt profits made from the connect program from taxes until Nov. 16, 2017.

The benchmark Shanghai Composite Index opened at 2,506.86 points, up 28.04 points, or 1.13 percent, before closing at 2,474.01 in the afternoon, down 0.19 percent.

Hong Kong stocks moved up 225.68 points, or 0.94 percent, to open at 24,313.06, before closing at 23,797.08, down 1.21 percent.

LANDMARK IN CAPITAL MARKET

The connect program is conducive to "consolidating the role of Hong Kong as an international financial center", and "speeding up the building of Shanghai as an international financial center" to raise the competitiveness of China's overall capital market, said China Securities Regulatory Commission (CSRC) chairman Xiao Gang.

It is also "conducive to the internationalization of RMB and boosting the convertibility in cross-border capital and financial transaction," Xiao added while speaking at the launch ceremony in Shanghai.

In anticipation of surging demand for the yuan, the Hong Kong Monetary Authority ditched long-standing currency conversion limits on Monday, which will make it easier for investors to put money into yuan assets and participate in the Shanghai-Hong Kong stock connect.

Xiao hailed the program as a "major institutional innovation" in capital markets, which heralds a new model -- whereby operation is convenient and risks controllable -- for cross-border securities investment.

Xiao's views were echoed by officials in Hong Kong.

Speaking at the launch ceremony, Hong Kong's Chief Executive Leung Chun-ying said the scheme was of "historic significance for both Hong Kong and the mainland markets".

The program will increase the competitiveness of both stock markets and enhance Hong Kong's status as a major offshore RMB trading hub, the chief executive added.

Hong Kong Exchanges and Clearing Limited (HKEx) chairman Chow Chung-kong said it is a "breakthrough in the opening up of China's financial markets" and an "important milestone in the development of Hong Kong as a unique gateway between the mainland and international investors."

Xia Yang, head of UBS China Equities, said the program is a milestone in the evolution of China's financial sector and the opening of its capital markets.

It will provide a significant boost to international participation in China's equity market, providing international investors with access to the 3.9 trillion U.S. dollar A-share market, he said.

As analysts expect HKEx' mutual connectivity with the Shenzhen Stock Exchange in the next couple of years, the connect program represents a big step toward market convergence and creation of the world's second-largest stock market. If the HKEx is connected to both of China's stock exchanges, Shanghai and Shenzhen, it would offer access to a combined market of over 7 trillion U.S. dollars and an annual turnover of more than 9 trillion U.S. dollars.

Based on 2013 numbers, this would make it the second-largest stock market in the world, according to Sun Yu, head of China Equity Strategy of HSBC.

This should increase the scale and relevance of these markets and also improve market efficiency and the robustness of China's financial system in general, said Sun.

The stock link is also expected to have a ripple effect in wider Chinese markets.

The co-operation between Hong Kong and Shanghai shows the way forward for other markets in China, namely, a coordinated and controlled approach to opening markets, said the HSBC expert.

The HKEx can apply the same model to other asset classes, such as derivatives through the London Metal Exchange (LME) platform, interbank bond market and foreign exchange.

"China's capital markets now face rare historic opportunities," Xiao Gang said at the launch ceremony.

"We must work to promote reform and development through opening-up so as to gradually establish a multi-tier capital market system," Xiao added.