White Collar

Stock through train will chug along the weight of regulatory restrictions

Regulatory restrictions are likely to weigh down retail interest in the cross-border stock scheme

PUBLISHED : Monday, 04 August, 2014, 4:28pm
UPDATED : Tuesday, 05 August, 2014, 2:43am

Expect the stock through train to leave the station on time in October, but wind back your hopes for a speedy journey as the much-hyped vehicle for the cross-trading of shares in Hong Kong and Shanghai chugs along under the burden of regulatory restrictions.

Still, optimism towards the scheme has been reflected in heady turnover of late for the Hong Kong market. On Friday, this reached HK$79.8 billion, an impressive margin on the average daily turnover of about HK$60 billion in the first half.

Some brokers believe some fund managers and investors have been front running to buy up in the local market to position themselves for an expected boost in share prices surrounding the launch of the programme.

The through train, announced by Beijing in April, will allow retail investors for the first time to cross-trade stocks in Hong Kong and Shanghai.

The figures indicate a willingness to test the waters but a reluctance to hitch a ride

A Bank of China (Hong Kong) survey of retail investors shows interest is there for the scheme. The lender found 54 per cent of 90 of its securities clients polled would like to buy in the A-share market within three months of the programme's launch.

So far, so good. But other figures from the survey are more telling. They indicate clients would invest only a small portion of their portfolio in A shares. Only 2 per cent would invest more than half of their portfolio in A shares, while 24 per cent would invest only 5 to 10 per cent of their funds. The figures indicate a willingness to test the waters but a reluctance to hitch a ride from day one.

Lack of market knowledge is a key factor. Aside from those mainland companies that are dually listed in Hong Kong and Shanghai, the hundreds of other mainland firms in the latter's A-share market are unknown propositions. While many banks and brokers have started offering seminars - and are increasing their research output - to educate investors about A shares, it still presents as a steep learning curve.

Then there are the regulatory restrictions. Hong Kong investors wanting to buy A shares must accumulate sufficient yuan holdings to accommodate a daily exchange cap of 20,000 yuan (HK$25,127).

If Beijing wants to boost the popularity of the scheme, it should scrap this restriction, which effectively requires investors to build up a pool of yuan funds before the October launch. Only when investors can easily exchange other currencies into yuan will they will be willing to use it for investment.

Quotas are another hurdle for would-be investors. Under the cross-trading scheme, Beijing caps Hong Kong investors' total trades at 13 billion yuan a day and 300 billion yuan for mainland stocks. For mainlanders, investment in Hong Kong stocks is capped at 10.5 billion yuan per day and up to 250 billion yuan in total. Once the quota is reached, investors can only sell stocks.

It suggests the through train is heading for a sluggish start, unless Beijing is willing to ease its grip on the wheel.