Shanghai-Hong Kong Stock Connect

Transcription

1 Markets and Securities Services Citi Online Academy June 11, 2014 Shanghai-Hong Kong Stock Connect The Game-Changing Breakthrough in Accessing China This discussion is provided for informational purposes only. For further information please contact today s presenter Cindy Chen (cindy.t.chen@citi.com) or your Citi Representative.

2 Important Note This document is solely for information and Citi will not be responsible for updating any information contained herein. It is not intended to provide specific advice on any other matter. If advice is required legal, tax or otherwise you should consult your own advisers, legal or otherwise. No responsibility for any loss occasioned as a result of using this document is accepted. Under no circumstances is it to be considered an offer to sell or a solicitation to buy any investment or product. At the time of publication, this information was believed to be accurate, but Citi makes no representation or warranty as to correctness of the information set forth above. The information in this document does not constitute a recommendation, solicitation or offer by Citi for the purchase or sale of any securities, nor shall this material be construed in any way as investment or legal advice or a recommendation, reference or endorsement by Citi. The ultimate decision to proceed with any related transaction rests solely with you. Citi is not acting as your advisor or agent. The implementation of Shanghai-Hong Kong Stock Connect is subject to conditions, including regulatory approvals, completion of all necessary development work and market readiness. The information provided in this presentation is provided on an as is and as available basis and may be amended or changed in the course of the implementation of Shanghai-Hong Kong Stock Connect. It is not a substitute for professional advice which takes account of any specific circumstances. 1

3 Overview Shanghai-Hong Kong Stock Connect is viewed as a significant breakthrough for Mainland and Hong Kong markets. What is Shanghai-Hong Kong Stock Connect? Shanghai-Hong Kong Stock Connect (Stock Connect) is a mutual market access program, through which investors in Hong Kong and Mainland China can trade and settle shares listed on the other market respectively via the exchange and clearing house in their local market Hong Kong Stock Exchange (SEHK) is the world s 6th largest stock market by market capitalization at US$ 3.1 trillion as of year-end 2013 Shanghai Stock Exchange (SSE) is the world s 7th largest stock market by market capitalization at US$ 2.4 trillion as of year-end 2013 Two markets combined (US$5.5 trillion) allow them to achieve top three position leaping ahead of Japan and London markets Paves the way for mutual market access for other asset classes Largest Domestic Equity Market Capitalizations at Year-end 2013 Exchange End-2013 (US$ Billion) End-2012 (US$ Billion) 1. NYSE Euronext (US) 17,950 14, NASDAQ OMX (US) 6,085 4, Japan Exchange Group 4,543 3, London Stock Exchange Group 4,429 3, NYSE Euronext (Europe) 3,584 2, Hong Kong Exchanges 3,101 2, Shanghai SE 2,497 2, TMX Group 2,114 2, Deutsche Börse 1,936 1, SIX Swiss Exchange 1,541 1,233 Source: World Federation of Stock Exchanges Order Flow Hong Kong Mainland China HK and Overseas Investors SEHK Members Northbound SEHK Subsidiary SSE SEHK SSE Subsidiary Southbound SSE Members Eligible Mainland Investors Home Market rules or laws apply to the extent possible; price discovery remains in the home market. 2

4 Stock Connect vs. QFII/RQFII Stock Connect provides another channel for cross-border portfolio investment flow between Mainland China and Hong Kong markets. Stock Connect (Northbound) RQFII (began in 2012) QFII (began in 2003) Quota Aggregated quota : RMB 300bn (~US$50bn) Daily quota : RMB 13bn (~US$2bn) Quota Ceiling: RMB 270bn for Hong Kong, RMB 50bn for Singapore and RMB 80bn for London RMB198bn approved for HK, $3bn London (Apr 14) Quota Ceiling: US$150bn US$ 55bn quota approved (as of April 2014) Eligible Investors or Institutions All Hong Kong and overseas investors (including retail and hedge funds) will be allowed to trade SSE Securities via local brokers (i.e. SEHK Participants) Hong Kong/London/Singapore based subsidiaries of PRC fund management companies, securities companies, domestic commercial banks, insurance companies Other institutions registered and mainly operated in Hong Kong/London/Singapore and possess asset management license from the relevant regulators of their jurisdictions Access Bilateral (access to SSE and SEHK) Inflow to Mainland China Inflow to Mainland China Commercial Banks ( 10yrs in operation, USD 5 billion AUM, USD300mm Tier 1 Capital ) Securities Companies ( 5yrs in operation, USD 5 billion AUM, USD500mm Capital ) AMC, insurance companies and other institutions (experience of 2+ years, and AUM USD 500mm) Currency RMB RMB USD or other major foreign currency Eligible Investments All constituent stocks of SSE 180 & 380 All dual-listed shares i.e. SSE-SEHK A+H Exceptions: Shares that are not traded in RMB, Shares under risk alert, IPOs Stocks, bonds, securities investment funds, warrants, IPOs, bond issuance and index futures Same as R-QFII Liquidity Daily and no restriction for sell transaction Buy trades are subject to quota on net buy Trade and settlement flow are subject to a closed-loop mechanism under which incomes from sales of securities shall be returned to origin instead of being deposited with local market. RQFII product (excl. open-ended fund) : - 6 months injection period - 1 year lock-up period - Monthly repatriation allowed. ( Quota will be reduced accordingly) - R-QFIIs need to provide audit reports issued by domestic accounting firm and relevant tax payment evidence if R-QFIIs repatriate investment gains Open-ended fund RQFIIs : - Daily injection and repatriation - No lock-up period - Quota shall be used within 1 year upon approval QFIIs (excl. China open-ended fund) : - 6 months injection period - Lock-up period: 3 months for pension, insurance, mutual funds, charitable funds, endowment funds, governments and monetary authorities; 1 year for other QFIIs - Monthly repatriation (up to 20% of its total asset of QFII investments at end of last year) allowed but quota will be reduced accordingly. For profit repatriation, audit reports issued by domestic accounting firm and relevant tax payment evidence are needed Defined China Open-ended fund : - 6 months injection period - 3 months lock-up period - Weekly injection and repatriation permitted - Monthly repatriation capped at 20% of its total asset of QFII investments at the end of last year. * For bonds traded in China interbank bond market, QFII&R-QFII should further seek PBOC s approval for market access. 3

5 Key Features Stock Connect allows investors, via local brokers, to purchase or sell shares listed on the SEHK and SSE. Eligible Investors Eligible Market Participants Eligible Securities Quota (Net Basis) Price Limit or Day Trading Trading Day/Hours Northbound No restrictions, all Hong Kong and overseas institutional and individual investors Co-exist w ith QDII, QFII or RQFII schemes SEHK Participants (EPs and CPs) subject to meeting certain eligibility and readiness requirements. All constituent stocks of the SSE 180 and 380 All dual-listed shares i.e. SSE-SEHK A+H (68) Exceptions Shares that are not traded in RMB Shares under risk alert No IPOs Aggregate quota: RMB300 billion (calculated end of day) Daily quota: RMB13 billion (calculated on real-time basis) First-come-first-served basis, no restriction on sell ±10% on previous closing price; any orders w ith price beyond the price limit w ill be rejected Day trading not permitted (no same day turnaround) Available w hen both markets are open for trading and banking services are available on the corresponding settlement days Follows trading hour of SSE but SEHK w ill accept orders five minutes before SSE opens Opening Call Auction: 09:15 09:25 Continuous Auction (Morning): 09:30 11:30 Continuous Auction (Afternoon): 13:00 15:00 Settlement Settlement cycle: T for securities, T+1 for cash Settlement currency: RMB 568 stocks 1 90% Market Cap 80% ADT Southbound All Mainland Institutional Investors Individual Investors holding an aggregate balance no less than RMB500,000 in their securities and cash accounts SSE Members All constituent stocks of the HS LargeCap (78) and HS MidCap (163) All dual-listed shares i.e. SSE-SEHK A+H (68) Exceptions 266 stocks 1 Shares that are not traded in HKD 82% Market Cap A+H shares on any other mainland exchange 78% ADT No IPOs Aggregate quota: RMB250 billion (calculated end of day) Daily quota: RMB10.5 billion (calculated on real-time basis) First-come-first-served basis, no restriction on sell No price limit No restriction on day trade Available w hen both markets are open for trading and banking services are available on the corresponding settlement days Follows trading hour of SEHK Opening Call Auction: 09:00 09:30 Continuous Auction (Morning): 09:30 12:00 Continuous Auction (Afternoon): 13:00 16:00 T+2 for both securities and cash Settlement currency: RMB, how ever trade w ill be quoted in HKD 1. SEHK Investor Participants (IPs) are not eligible at the initial stage; No. of stocks as of 10 April 2014; MC as of March 31 st 2014; Average Daily Turnover (ADT) is for Jan-March 2014; Latest list of securities is available on HKEx website. 4

6 Quotas To ensure stability in Hong Kong and Mainland markets, and the smooth implementation of the Stock Connect, both aggregate and daily quotas have been set up. Northbound Southbound Aggregate Quota RMB300 billion RMB250 billion Daily Quota RMB13 billion RMB10.5 billion Key Principles Quota control only applies to buy orders, i.e. sell orders are always allowed Quota is used on a first-come, first-served basis Quota may be adjusted in the future Aggregate Quota When to calculate: At the end of each trading day Aggregate Quota Balance: Aggregate Quota - Aggregate Buy Trades + Aggregate Sell Trades If Aggregate Quota Balance <Daily Quota: Suspend buy order input for the next trading day If Aggregate Quota Balance increases to Daily Quota level: Resume buy order input for the next trading day Daily Quota When to calculate: Real-time during trading hours Daily Quota Balance: Daily Quota - Buy Orders + Sell Trades + Adjustments (e.g. Buy Order cancelled, Buy Order rejected by SSE, Buy Order executed at a better price) If Daily Quota balance 0 During opening call auction (Pre-opening): Reject new buy orders until DQ Balance becomes positive (e.g. due to Buy Order cancellation) During continuous auction (Continuous Trading): Suspend buy order input for the remainder of the day Buy orders already input in CSC before suspension will not be affected Quota Information Quota information will be published on HKEx website at scheduled time 5

7 Settlement of Northbound Trades in CCASS Sell order is subject to pre-trade checking and settlement process for A-shares is tight and different. Securities Settlement on T ( Cash Prepayment to transfer SSE Securities Between Counterparties) Northbound Trading Session Final Clearing Statement 1 st CNS BSR (Deliver Shares) 2 st CNS BSR (Receive Shares) SI BSR (FOP) T 9:15am 11:45am 3:00pm 4:00pm 4:30pm 6:00pm 7:30pm 8:30pm Cash prepayment to release CNS allocated shares On Exchange Settlement SI Settlement via DI (FOP) Off Exchange Settlement CPs inquire money obligations for next day settlement: Settled Position Report Inquire Money Position Cash Settlement on T+1, in RMB via RTGS (If cash is not paid on T) T+1 8:00am 9:30am 12:00pm After 12:30pm Designated Banks make RTGS payments to HKSCC on behalf of CPs (for CPs w/ net payable items) HKSCC makes RTGS payments to CPs (for CPs w/ net receivable items) CPs download Statement of Money Ledger for money obligations Designated Banks receive CHATS Payment Instruction Report 1. CNS Continuous Net Settlement (on exchange settlement). 2. SI Settlement Instruction (off exchange settlement batch) 3. DI Delivery Instruction (off exchange settlement before the batch) 6

8 Implementation Timeline Implementation is expected to take at least six months, subject to SFC approval and market readiness. Approximately Six Months from the Date of the Joint Announcement to Complete the Preparation for the Formal Launch April May June July August September October 10 April 2014 May 2014 June/July 2014 August 2014 September 2014 October 2014 Joint Announcement 1 st round of EP / CP briefing 2nd round of EP / CP briefing 3rd round of EP / CP briefing (Market Rehearsal arrangements) Market Rehearsal and subsequent launch (launch date TBD) Formal Launch (Subject to SFC approval) End of May 2014 By mid-june Return of Form of Indication of Interest by EP and CP EP and CP submit application to participate in SH HK Stock Connect at initial launch 7

9 Key Takeaways Impact Mainland China Market Hong Kong Market Securities Firms Investors Short term: Narrow s the A-H discount/premium Longer Term: Improve A-share market fundamentals and efficiency w ith more balanced investor base; A-shares may be added to the global index (e.g. MSCI Emerging Market) w hich would result in substantial liquidity flow into A-share market Currently foreign investors account for < 1% turnover, domestic retail investors accounts for >80% Shanghai Stock Exchange to remain relevant as Mainland China continues to liberalize outflow investment flow Hong Kong Stock Exchange to remain relevant as China continues to liberalize cross-border investment flow Paves the w ay for mutual market access for other asset classes (e.g. commodities, fixed incomes etc.) Currently Institutional (mainly foreign) accounts for 60% turnover; retail investors (mainly local) accounts for 20% Other than the exchanges, large securities firms in Hong Kong and Mainland will benefit most. In addition to brokerage services, securities firms may consider offering foreign exchange services, margin trading etc. QFII Broker/dealers: Good portion of their business may be related to access or structured products such as p-notes. This development may slowly shift the flow aw ay from these products over time. Retail investors w ill have the ability to trading SEHK and SSE Securities via Stock Connect Hedge fund managers, w hich is currently not a preferred investor type for QFII/RQFII, w ould be able to get direct access to A-share market and may be less reliance on access products. Existing QFII/RQFII asset managers are unlikely to shift aw ay from QFII/RQFII scheme since Stock Connect may not be a reliable channel for them to create their desired portfolio. How ever many are also expected to leverage Stock Connect to supplement their existing QFII/RQFII scheme. Institutional investors currently not qualified or do not apply for QFII due to various reasons (i.e. domiciled country has no MOU with China, doesn t meet QFII capital/aum qualification, liquidity concerns) will have the ability invest into A-shares via participating Stock Connect brokers in Hong Kong. How to get ready? Interested investors should inquiry whether their broker(s) will be participating in the SH-HK Stock Connect during initial launch in October Investors should also have a RMB cash account, access to FX services and custodian in Hong Kong or China market to better tap RMB liquidity and minimize settlement risk as there w ill be no buy-in exemption for A-shares. 8

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