The mainland-Hong Kong Stock Connect mechanism has been running smoothly and orderly since its launch. It has promoted the cooperation between and development of the two markets and earned positive review from the market. As of the end of June 2018, the aggregate transaction amount of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect was CNY11.67 trillion. The aggregate northbound transaction amount for the Shanghai Connect was CNY4.96 trillion, the average daily turnover was CNY5.897 billion, and the accumulated net inflow was CNY281.059 billion. The aggregate northbound transaction amount for the Shenzhen Connect was CNY1.94 trillion, the average daily turnover was CNY5.324 billion, and the net inflow was CNY226.639 billion. The southbound transaction amount for both of the Shanghai Connect and Shenzhen Connect was CNY4.77 trillion, with an average daily turnover of CNY7.315 billion and a cumulative net inflow of CNY695.13 billion. Since its opening, the eligible stocks for southbound trading under the Shanghai-Hong Kong Stock Connect continues to increase, from 268 at the time of opening to the current 317, and the number of underlying stocks for southbound trading under the Shenzhen-Hong Kong Stock Connect has increased from 417 at the time of opening to 462 at present.
On May 7, 2018, Hang Seng Index Company Limited issued the Consultation Conclusions on the Eligibility of Foreign Companies, Stapled Securities and Weighted Voting Right Companies for Inclusion in the Hang Seng Composite Index, announcing that the coverage of the Hang Seng Composite Index (“HSCI”) will be expanded to include Foreign Companies, Stapled Securities and Weighted Voting Right Companies. The new types of securities shall be eligible for inclusion as of the third quarter of 2018. Prior to this, the HSCI does not include foreign companies and stapled securities, nor does it have weighted voting right companies.
SSE and SZSE noticed the major change in the HSCI compiling method. They conducted researches on and consulted some mainland brokers and investors, and have considered the feedback and opinions of relevant parties. Most investors showed a lack of understanding of these new types of securities. Some said that it is difficult to grasp the operation and financial systems of foreign companies, and some have no clue about stapled securities, while others expressed that they would reserve their judgment in this regard before weighted voting right companies could be introduced into the mainland market and before they are familiar with them. Some securities companies believed that mainland investors have not really understood the above three types of securities, nor their complexity and the risks involved. Furthermore, there isn’t any investor education in this regard. Weighted voting right companies are also a new thing in the HKEX market. It would be better for mainland investors to wait until there is a certain number of such companies in HKEX market and after a certain period of market operation. Some securities companies also said that the sample space is an important factor in index compilation. The inclusion of these three special types of stocks has substantially changed the stock selection scope of the HSCI, which is the basis for the underlying stocks for southbound trading. The HSI, which reflects the trend of the HKEX market, does not adjust accordingly.
After carefully analyzed and evaluated the above investigation results, SSE and SZSE believed that the adjustment of the HSCI stock scope constitutes a special circumstance provided for by Article 55 of the Measures for the Implementation of Shanghai-Hong Kong Stock Connect Business and Article 56 of the Measures for the Implementation of Shenzhen-Hong Kong Stock Connect Business. As per the above Articles, stocks with “other special circumstances as determined by the exchange” shall not be included for southbound trading. Therefore, the three types of securities newly added to the HSCI will not be included in the scope of underlying stocks for southbound trading.
The mainland-Hong Kong Stock Connect mechanism plays an important role in the two-way opening of China's capital market and is a successful example of cooperation between the mainland exchanges and the HKEX. As the market continues to open up, the underlying stocks for southbound trading will continue to improve and expand. Next, SSE and SZSE will firmly push forward the reform and opening up of the capital market, further cooperate with HKEX, and conduct researches and thorough evaluation on issues of concern of the market with market participants. SSE and SZSE shall mobilize their members to carry out supporting preparatory work, create favorable conditions to enlarge the scope of underlying stocks under the Stock Connect, and continuously optimize the Stock Connect mechanism.
