Through train stock scheme to lift market turnover 20pc
Brokers expect the through train stock scheme starting in October would add about 20 per cent to daily market turnover and change the investing landscape by boosting the number of mainland and overseas retail investors trading here.
Stock market players have high expectations on turnover growth after Hong Kong Exchanges and Clearing said the quota on trades would be calculated on a net-buying basis, which offsets sales orders with buy orders.
Under the scheme, the cap on trades by Hong Kong investors in mainland stocks is 300 billion yuan (HK$371 million), with a daily limit at 13 billion yuan.
For mainlanders, the investment quota in Hong Kong stocks is 250 billion yuan, capped at 10.5 billion yuan per day.
This means it would take much longer to exhaust the quota. It could even could run forever if buy and sell orders offset each other.
Jeffrey Chan Lap-tak, the chairman of the Hong Kong Securities Association, said turnover could grow at least 20 per cent to about HK$85 billion a day, up from HK$70 billion now.
"Hong Kong brokers would be able to benefit from the higher turnover," Chan said. "They could also attract new customers who want to trade A shares. They could be Hong Kong retail investors or those in the US, Europe and other Asian countries who want to trade in the mainland market."
A Credit Suisse report said an increase of 20 per cent in market turnover would bring more new listings to the city.
"HKEx attractiveness as a listing destination [has been] enhanced and [we] would see more global stocks listed," it said.
HKEx confirmed that all Hong Kong-based or international individual investors can trade the 568 stocks listed on the Shanghai exchange as long as they set up accounts and place their orders through a Hong Kong-based broker.
The local brokers would pass the order to the HKEx, which will then give it to its Shanghai counterpart to execute the trade.
"This is a breakthrough as individual investors have never been allowed to directly invest in the A-share market," Chan said. "They can now buy through some fund products offered by the big firms that are allowed to invest in the mainland market.
"The through train would bring many international retail investors to trade through Hong Kong. This will strengthen Hong Kong market's position as a gateway for international investors to invest in China."
HKEx data showed 61.2 per cent of turnover last year came from institutional investors, 22.4 per cent from retail investors, and 16.3 per cent from trading by brokers.
Overseas markets such as New York or London are dominated by institutional investors. By adding retail investors here, the scheme may not help Hong Kong raise its stature or its ranking in world market turnover.
Hong Kong is the sixth-largest bourse in the world by market capitalisation, but is ranked eighth in terms of market turnover.
The technology-heavy Nasdaq OMX in New York, the most traded market worldwide, had a turnover of about US$24.43 trillion in the first 11 months of last year, dwarfing the US$1.33 trillion of HKEx.
The New York Stock Exchange's turnover is 10 times that of HKEx and London is 2.5 times bigger.
Chan said the through train would allow overseas retail investors to trade directly in mainland China for the first time, and this would be a big challenge.
"Many overseas investors have no idea about mainland tax rules or regulations," he said. "Investor education and other investor protection measures would be important.
"The regulators need to clarify how international investors pay the capital gains tax in trading mainland stocks. They also need to say if overseas investors are allowed to participate in rights issues."
Jeanne Lee Sai-yin, the chairman of the Hong Kong Securities Professionals Association, said the scheme would see more mainland retail investors trading in the Hong Kong market.
Overseas investors accounted for 46 per cent of the Hong Kong market's turnover last year. The US led with 28 per cent, while Britain took 26 per cent and Europe 13.6 per cent. Mainland investors ranked fourth at 11 per cent.
"After the through train scheme starts, we are going to see more mainlanders trading in Hong Kong as the local market is well-established. There is a lack of good investment opportunities in the mainland," Lee said.
A survey by the Hong Kong Investment Funds Association showed 16 per cent of mainland visitors to Hong Kong last year came purely for the purpose of investment. Capital controls ban cross-border trading but mainlanders can invest in the city when they are here.
"Under the through train scheme, mainlanders would no longer need to travel here to buy Hong Kong stocks," Lee said. "Mainlanders are going to be important investors in Hong Kong.
"Hong Kong brokers can no longer only do research on Hong Kong companies. They would need to set up new research teams to prepare reports on A shares for their customers and to help clients to understand mainland regulations."