HKEx chief dispels fears about through-train scheme

HKEx chief releases the details of through-train plan, dispelling the fears of many investors

PUBLISHED : Wednesday, 30 April, 2014, 12:02am
UPDATED : Wednesday, 30 April, 2014, 5:03am

The stocks "through train" scheme is much bigger than initially thought as the total cap for cross-border investments will factor in only net buying orders rather than the entire turnover.

When the scheme - under which individual investors can cross-trade Hong Kong and Shanghai stocks from October - was announced this month, Beijing set the cap at 550 billion yuan (HK$690 billion) for Hong Kong and mainland investors, with no mention of a time frame.

Many brokers and investors complained the quota was too low as it was assumed the cap would be calculated on a gross turnover basis. Given the average daily turnover of the Hong Kong exchange, they estimated the quota could be exhausted in just 23 trading days. Such fears were dispelled yesterday when Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia unveiled the details of the scheme, saying the quota would be counted on a net-buying basis.

So if investors in Hong Kong buy 10,000 yuan worth of shares on a given day and sell 5,000 yuan of shares, only the net of 5,000 yuan would be considered while totting up the quota.

This would mean the 550 billion yuan allowed by the scheme would go farther than initially estimated. On days when stocks bought and sold are equal in value, for example, the quota is left unaffected as net buying is zero.

The "through train" scheme caps Hong Kong investors' trades at 13 billion yuan a day and 300 billion yuan in total for mainland stocks. For mainlanders, investment in Hong Kong stocks are capped at 10.5 billion yuan per day and up to 250 billion yuan in total.

With the time frame not specified for the total quota, the net-buying rider not only means it would take much longer to exhaust the quota but also, at least in theory, the quota could run forever.

Cross-border buying under the through-train scheme would stop once the daily or total quota is reached but investors would be allowed to continue to sell stocks. If the selling exceeds the buying, the quota would be restored, allowing for buying to resume again.

"The quota would be on a first come, first served basis. There'll be no allocation among brokerage firms. All brokers would be allowed to trade under the through-train scheme for customers, they don't need to apply for individual quotas," Li told a media briefing yesterday, putting brokers' fears to rest.

"The quota is aimed at maintaining stability in Hong Kong and mainland China markets. It will ensure a smooth launch of the through-train scheme."

Ben Kwong Man-bun, chief operating officer of securities firm KGI Asia, said: "If the quota is calculated on a net basis, it will mean the total turnover will be much higher than 550 billion yuan cap would suggest. This scheme becomes a lot more flexible on a net basis than on gross terms."

Kwong said the new scheme would definitely trigger investor interest in cross-trading but added that he believed it would be much better controlled than the last time round.

In August 2007, Beijing had announced a similar cross-border trading plan but pulled it back just months later because of worries it was getting out of hand.

"Back in 2007, there were wider gaps between the A shares listed on the mainland and H shares listed in Hong Kong. Now the gap is much narrower and the arbitrage opportunities much lower," Kwong said.

According to Kwong, another problem is that Hong Kong investors would need to trade in yuan.

"Beijing still caps daily exchange by Hong Kong individuals to 20,000 yuan, which would restrict local investors' access to that currency and limit their investment," Kwong said.

Li said the HKEx and the Shanghai Stock Exchange would set up subsidiaries in each other's exchanges to handle the cross-trading. Investors will be able to trade through their local brokers, who will pass the orders to the exchange to pass on to its subsidiary in the other exchange.

On the mainland, only institutional investors or individuals with 500,000 yuan in their securities account can participate, while the scheme is open to all investors in Hong Kong.