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On 3 March 2023, SZSE released the Implementation Measures of Shenzhen Stock Exchange for the Shenzhen-Hong Kong Stock Connect (Revised in 2023) (hereinafter referred to as the “Implementation Measures”). The Press Secretary of SZSE answered reporters’ questions about relevant information.
I. Q: Please introduce the background and process of the revision of the Implementation Measures.
A: The China Securities Regulatory Commission (CSRC) and the Securities and Futures Commission (SFC) of Hong Kong issued a joint announcement on 19 December 2022, to, in principle, agree to further expand the scope of underlying stocks under the stock connect and specify that upon approval of both the CSRC and the SFC, related stock exchanges can formulate regulations on the specific conditions and adjustment mechanisms for the inclusion of underlying stocks. In order to implement the consensus of both the CSRC and the SFC to further expand the scope of underlying stocks under the stock connect and constantly optimize and improve the interconnection mechanism, in the early phase, SZSE revised the Implementation Measures of Shenzhen Stock Exchange for the Shenzhen-Hong Kong Stock Connect and publicly solicited opinions from the market. A total of one suggestion about the adjustment of the eligibility threshold for investors of the Shenzhen-Hong Kong Stock Connect - Southbound Trading was collected during the solicitation of opinions. Upon conscientious evaluation, as the relevant suggestion did not relate to the above expansion of the scope of underlying stocks, no adjustment was made. The above threshold will be further analyzed and studied in combination of the business operation of the Shenzhen-Hong Kong Stock Connect. Upon approval of the CSRC, SZSE released the Implementation Measures.
II. Q: Please briefly introduce the changes in the selection criteria for underlying stocks of the Shenzhen-Hong Kong Stock Connect - Northbound Trading before and after the revision of the Implementation Measures.
A: This revision of the Implementation Measures follows the principle of being “open, transparent, and controllable”, and further enhances the inclusiveness of the selection criteria for underlying stocks of the Shenzhen-Hong Kong Stock Connect - Northbound Trading while preventing business risks. More stocks of companies listed on SZSE have been included in the scope of underlying stocks of the Shenzhen-Hong Kong Stock Connect - Northbound Trading to achieve a higher-level opening up.
First, the benchmark index of stocks of the Shenzhen-Hong Kong Stock Connect - Northbound Trading has been extended to the SZSE Composite Index from the current Shenzhen Component and SZSE Smid Cap Inno. The constituent stocks of the benchmark index basically cover all stocks listed on SZSE, and the number of constituent stocks has been significantly raised from 1,000 before the expansion. Second, in response to the characteristic of SZSE that the proportion of small-cap stocks is high, the cap threshold of stocks of the Shenzhen-Hong Kong Stock Connect - Northbound Trading has been lowered from CNY 6 billion to CNY 5 billion. Meanwhile, in order to prevent the volatility risk arising from the low liquidity of stocks, inclusion requirements are set up simultaneously. For instance, the daily turnover has been set to be above CNY 30 million and the proportion of all-day suspension trading days should be lower than 50%. Third, an adjustment buffer mechanism where the exclusion condition is lower than the inclusion condition is set up to reduce the frequency of inclusion and exclusion of underlying stocks. Specifically, during the semi-annual inspection of adjustments, if the daily market capitalization of a non A plus H stock of the Shenzhen-Hong Kong Stock Connect - Northbound Trading is lower than CNY 4 billion, or its daily turnover is lower than CNY 20 million, or its proportion of all-day suspension trading days is more than 50%, the stock will be removed from the Shenzhen-Hong Kong Stock Connect - Northbound Trading. Fourth, the initial inclusion of corporate stocks with differentiated arrangements of voting rights under the Shenzhen-Hong Kong Stock Connect - Northbound Trading has been specified, by reference to the initial inclusion of corporate stocks with weighted voting rights under the Shenzhen-Hong Kong Stock Connect - Southbound Trading.
III. Q: Please briefly introduce the changes in the adjustment mechanism for underlying stocks of the Shenzhen-Hong Kong Stock Connect - Northbound Trading before and after the revision of the Implementation Measures.
A: In order to better adapt to the trading habits of investors of the Shenzhen-Hong Kong Stock Connect - Northbound Trading and consider the adjustment characteristics of constituent stocks of the SZSE Composite Index, upon the revision of the Implementation Measures, a regular inspection mechanism (semi-annually and monthly) and an interim adjustment mechanism have been established for stocks of the Shenzhen-Hong Kong Stock Connect - Northbound Trading. First, a semi-annual inspection mechanism has been created. The constituent stocks of the SZSE Composite Index will be inspected at the end of May and November every year. Generally, the list of underlying stocks will be announced and adjustments will be conducted in the next month. (An adaptive adjustment of the time will be made in case of a holiday. The specific time is subject to the relevant announcement of the HKEX Securities Trading Services Co., Ltd.) Second, a monthly inspection mechanism has been developed. The stocks that are newly included in the SZSE Composite Index in the current month or the constituent stocks of the SZSE Composite Index whose risk warnings have been canceled in the current month will be inspected at the end of each month. The stocks that meet conditions will generally be included in the scope of underlying stocks of the Shenzhen Stock Connect in the next month. Third, the interim adjustment mechanism has been continued. Under the interim adjustment mechanism, inclusion and exclusion of A-shares of A plus H share companies as well as temporary exclusion of stocks with risk warnings and delisting transition are consistent with the current arrangements.
Inspection timeliness has been further strengthened through the new adjustment mechanisms. The list of eligible underlying stocks, upon monthly and semi-annual inspections, will be announced on the second Friday in the next month from the day of inspection (adaptive adjustments will be made in case of holidays) and take effect on the first trading day of the Shenzhen Stock Connect after the next Friday from the day of the announcement.
IV. Q: Please briefly introduce the changes in the selection criteria and adjustment mechanism for underlying stocks of the Shenzhen-Hong Kong Stock Connect - Southbound Trading before and after the revision of the Implementation Measures.
In accordance with the joint announcement, major foreign corporate stocks listed in Hong Kong, compliant with relevant conditions, in the Hang Seng Composite Index (HSCI) have been included in the scope of underlying stocks of Shenzhen-Hong Kong Stock Connect - Southbound Trading, based on the current underlying stocks. Additionally, an adjustment buffer mechanism where the exclusion condition is lower than the inclusion condition is established based on the principle of reciprocity. Specifically, for stocks of Shenzhen-Hong Kong Stock Connect - Southbound Trading that are constituent stocks of the Hang Seng Composite Small Cap Index but are not A plus H shares, if their average month-end market capitalization is lower than HKD 4 billion will be excluded from Shenzhen-Hong Kong Stock Connect - Southbound Trading. Except for the above content, the selection criteria and adjustment mechanism for stocks of Shenzhen-Hong Kong Stock Connect - Southbound Trading remain unchanged.
Investors should be aware that some foreign companies may have special requirements for taxes and fees and corporate behavior that are different from the current requirements for stocks of Shenzhen-Hong Kong Stock Connect - Southbound Trading, such as the necessity of paying financial transaction taxes to foreign governments and distributing dividends at different tax rates to investors. Given that the current market business and technical systems cannot support the above special arrangements, such corporate stocks that are eligible to be included in the Shenzhen-Hong Kong Stock Connect - Southbound Trading will not be included in this expansion of the scope of underlying stocks of Shenzhen-Hong Kong Stock Connect temporarily. All parties will continue to accelerate the relevant work.
V. Q: Please introduce the relevant arrangements for the initial implementation of the expansion of underlying stocks.
The Implementation Measures will take effect on March 13. In comprehensive consideration of the transition from old to new rules, the following arrangements will be made:
First, the existing stocks of Shenzhen-Hong Kong Stock Connect - Northbound Trading (except for those with risk warnings) on March 12 will not be excluded on the effective date of the Implementation Measures. As the calculation of underlying stocks and data exchange take some time, February 17 is set as the inspection day of the first batch of stocks of Shenzhen-Hong Kong Stock Connect - Northbound Trading. Stocks on SZSE that are eligible on the inspection day will be included on the effective day of the adjustment of the first batch of stocks of Shenzhen-Hong Kong Stock Connect - Northbound Trading. Second, the inclusion and exclusion criteria for stocks of Shenzhen-Hong Kong Stock Connect - Southbound Trading, as stipulated in the Implementation Measures, will be applied on the effective day of the adjustment of the first batch of stocks of Shenzhen-Hong Kong Stock Connect - Southbound Trading. Third, the stocks of the Shenzhen-Hong Kong Stock Connect will be adjusted in line with the original implementation measures, before the effective day of the Implementation Measures. The stocks that are newly included in the SZSE Composite Index or the constituent stocks of the SZSE Composite Index whose risk warnings are canceled after the inspection day of the first batch of stocks of Shenzhen-Hong Kong Stock Connect - Northbound Trading and before the effective day of the Implementation Measures will be covered in the next monthly inspection,.
Specific arrangements will be made in the announcement of the Implementation Measures. The list of the first batch of stocks of the Shenzhen-Hong Kong Stock Connect and the effective day of adjustment will be announced later by SZSE and HKEX Securities Trading Services Co., Ltd.. Investors are advised to follow the future announcements.
