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Pre-check rule could see fewer investors ride through train

Mainland's morning settlement rule could be a hindrance to cross-border exchange integration

PUBLISHED : Monday, 18 August, 2014, 9:45am
UPDATED : Tuesday, 19 August, 2014, 12:48am

If Beijing wants to encourage more overseas investment in mainland A shares via the stock through-train scheme, due to start in October, it might have to rethink its 7.30am pre-check settlement rule.

More trading and settlement rules for the much-anticipated scheme have been unveiled recently and testing is due to start soon. With many investors, including those overseas, keeping a close eye on the scheme, Hong Kong Exchanges and Clearing will begin trials with more than 110 brokers from next Monday.

The scheme will connect the stock market trading systems of Hong Kong and Shanghai and, for the first time, allow investors to conduct cross-border trading of stocks listed in the two cities.

However, the settlement rules could put a dampener on the enthusiasm of overseas investors. The 7.30am pre-check requirement means that Hong Kong and overseas investors who want to sell Shanghai A shares will have to have the shares in the HKEx clearing house before 7.30am, two hours before the market opens.

This makes many Hong Kong and overseas investors uncomfortable because Hong Kong has a T+2 settlement rule that lets investors settle trades two days after they are made.

Many brokers and banks would need to adjust their settlement systems to comply with the 7.30am pre-check rule if they want to trade A shares, and that would be troublesome and make the A-share market less attractive. Overseas investors who want exposure to the mainland market may decide to stick with trading Hong Kong-listed H shares and the T+2 settlement rule.

If the mainland intends to match international practices, it should modify its rules to match those in Hong Kong - a market featuring active trading by many international investors.

Beijing may think it is making the market safer by preventing investors from selling shares before they put them in the clearing house. But it should look at the experience of Hong Kong, which has had a T+2 settlement rule for decades and where most traders settle their trades on time.

This shows the pre-check rule is not an essential risk-management measure. It is, however, a rule that will discourage international investors from trading in the Shanghai market.