White Collar

Why few retail investors might board the 'through train'

Curbs in latest version of cross-border share scheme will likely deter HK's smaller investors

PUBLISHED : Monday, 14 April, 2014, 10:43am
UPDATED : Monday, 14 April, 2014, 11:59pm

Tougher rules and disparate regulatory regimes may discourage retail investors from hopping aboard the revived "through train" - a scheme for cross-border trading of stocks in Hong Kong and on the mainland.

When Beijing first announced the proposal in August 2007, the city's stock market greeted it with enthusiasm. The benchmark Hang Seng Index rose almost a third and peaked above 30,000 points, while turnover tripled to HK$200 billion a day.

The mainland dropped the plan a few months later, and trading in Hong Kong fell back to normal.

The 2014 version of the through train is wider in scope. Unlike the 2007 scheme, which only allowed mainlanders to trade in Hong Kong-listed stocks, the new one - expected to kick off in October - will allow investors in the city as well to trade in Shanghai-listed stocks.

If we look into the detailed rules, however, the new version is in fact more restrictive and could deter retail investors from participating.

While the 2007 scheme would have allowed anyone with a bank account at the Tianjin branch of Bank of China to trade in Hong Kong stocks without a limit, the new plan permits only institutional investors, such as pension funds or insurance companies, and investors with 500,000 yuan (HK$628,000) in their mainland securities accounts to trade in Hong Kong stocks.

That threshold might not seem too high when compared with the criterion in the Hong Kong regulation that defines a professional investor, for the purpose of access to sophisticated investment products, as one who has at least HK$8 million.

However, the through train threshold sets a high bar for non-professional investors.

Hong Kong Exchanges and Clearing figures showed the median stockholding of a Hong Kong investor was about HK$130,000. If a brokerage in the city collapses, the exchange's compensation fund will pay up to HK$150,000 to each of its clients.

The threshold, equivalent to more than four times a typical Hong Kong investor's stockholding, may exclude mainland investors other than the wealthy or heavily indebted from trading in the city.

The scheme has no restrictions on which Hong Kong investors can trade in mainland stocks. But many Hong Kong retail investors day-trade - that is, they buy a stock and then sell it the same day to make the difference in the buying and selling prices, with no need to come up with the cash to settle the initial purchase.

The mainland's trading regulations and settlement cycle are different from Hong Kong's, so the city's investors will not be able to day trade on the Shanghai exchange. As a result, the through-train scheme may be less attractive to Hong Kong-based retail investors than it might seem.

Under the scheme, Hong Kong investors will trade mainland stocks in yuan, but the city's residents can only exchange up to 20,000 yuan a day. This is another obstacle in the way of the through train for Hong Kong's retail investors.