Beijing, keen to ensure a successful launch of a programme that marks a significant milestone in the liberalisation of capital controls on the mainland, announced yesterday that it would exempt investors from paying capital gains tax on stock-trading profits through the scheme.

In Hong Kong, several banks and brokers said some customers had given orders for exchanging large sums of yuan on Monday, when the 20,000-yuan daily exchange cap will be lifted, so that they could buy A shares when the scheme kicked off.

"Monday will basically be a 'buy'-orders-only market for the cross-border scheme because we do not have shares on hand to sell shares across the border," Hong Kong Securities Association chairman Jeffrey Chan said. "Hong Kong investors can only buy from the selling orders by mainland investors."

A broker at Galaxy Securities in Shanghai said mainland investors were more focused on an expected rally in the mainland's A shares when Hong Kong funds started to flow into the market on Monday. "Buying H shares doesn't interest most of the investors at all," he said.

The benchmark Shanghai Composite Index has climbed nearly 12 per cent since September, driven by anticipation of the launch of the stock through train scheme. It closed at 2,478.82 points yesterday.

Shenyin Wanguo Securities said the index could hit 3,000 points early next year as overseas funds flooded into A shares through the scheme.

"We certainly welcome fund inflows brought by the stock connect scheme, and it is the reason for us to hold on to the shares until the 3,000-point mark is seen," said Zhou Ling, a Shanghai-based hedge fund manager. "To be honest, we are betting that the market will rally when the scheme starts because the regulators have the clout to drive it up."

There has been speculation that state-linked funds such as the national pension fund and state-owned corporate investors will increase their A and H-share holdings to ensure a positive debut for the scheme.

In a last-minute announcement, the Ministry of Finance and the China Securities Regulatory Commission yesterday published the mainland tax policy for through train investments. Institutional investors have earlier expressed concerns about the lack of clarity on tax obligations.

Mainlanders will not have to pay the 10 per cent capital gains tax for three years from the profit they make from trading Hong Kong stocks under the scheme.

"The stock connect is a pilot scheme and the tax waiver will encourage mainlanders to buy Hong Kong stocks," the ministry said.

Capital gains tax will also be waived "temporarily" for Hong Kong and international investors trading A shares under the scheme as well as those trading under the qualified foreign institutional investor and the renminbi qualified foreign institutional investor quotas. The Ministry of Finance did not say how long the temporary waiver would last.

"This is great news as the capital tax issue has been a major concern for many international fund houses," said Bruno Lee Kam-wing, the chairman of the Hong Kong Investment Funds Association.

"The setback is that Beijing has not clarified how long the waiver for international investors will last. We would like to see a clearer timetable.

"The waiver and the Hong Kong Monetary Authority's announcement of the scrapping of the 20,000-yuan daily exchange cap will encourage investors to conduct cross-border trading under the through train. It also shows Beijing has listened to the concerns expressed by the markets over these two issues."

The scheme, announced in April, will allow Hong Kong and international investors to trade up to 13 billion yuan a day, or 300 billion yuan in total, in A shares listed in Shanghai. Mainland investors will be able to trade up to 10.5 billion yuan a day, or 250 billion yuan in total, in Hong Kong stocks. The quotas are calculated on a net basis, so if there are no sell orders in Hong Kong on Monday, the daily limit could easily be reached.

Chan said Hong Kong retail investors were ready to trade through the scheme, as were 100 of the 450 local brokers.

"Institutional investors may not start to trade on day one," he said. "Many institutional investors would need to seek clients' consent or mandates for them to trade in the new scheme."

Andrew Fung Hau-chung, executive director and head of global banking and markets at Hang Seng Bank, said a number of the bank's customers had inquired about trading A shares under the scheme.

"Based on feedback gathered at our recent investment seminars, many investors are considering whether to allocate part of their investments into A shares through stock connect," Fung said. "We will launch unlimited yuan conversion services on Monday for customers. We have received a number of customer inquiries."

Retail investors in Shanghai will not qualify for participation in the scheme unless they can deposit at least 500,000 yuan in their trading accounts.

"Those cash-rich mainlanders have been playing Hong Kong stocks for years through other channels and an influx of capital from the mainland to Hong Kong is unlikely," Haitong Securities analyst Zhang Qi said.

Janet Chong, an executive director at DBS Bank (Hong Kong), said some customers had asked the bank to prepare to exchange large sums of yuan on Monday for trading in A shares or other yuan products.