Hong Kong, mainland exchanges reach agreement on trading in shares of dual voting rights firms through stock connects

  • Exchanges in Hong Kong, Shanghai and Shenzhen to ‘promptly work on formulating’ rules
  • Agreement to be implemented by mid 2019
PUBLISHED : Monday, 10 December, 2018, 6:00am
UPDATED : Monday, 10 December, 2018, 6:00am

The Hong Kong stock exchange said on Sunday it had reached a consensus with counterparts in Shanghai and Shenzhen on trading by mainland China investors in Hong Kong-listed companies with dual voting rights.

The agreement, which could potentially benefit companies such as smartphone maker Xiaomi, is related to investment through the stock connect schemes that link exchanges on the mainland with the Hong Kong bourse.

Xiaomi shares fall after mainland bourses block them from Chinese investors in Stock Connect pool

“The three exchanges will promptly work on formulating relevant rules and will announce them to the market after completing the necessary procedures,” the Hong Kong exchange said in a statement. The new rules are expected to be implemented by the middle of next year, it added.

In July, the exchanges in Shanghai and Shenzhen said companies such as Xiaomi would be excluded from the stock connect schemes. The decision potentially cut billions of yuan in capital for the smartphone maker, and denied Chinese investors the chance to participate in the earnings of a company that promised to increase their value tenfold.

“It is a win-win situation for both Xiaomi and mainland investors,” said He Yan, an asset manager with Shanghai Shiva Investment. “Billions of yuan will be spent by mainland investors to buy Hong Kong-listed shares of Xiaomi, because it is still believed to be a promising mainland technology firm with huge growth potential.”

The stock connect schemes provide Chinese investors with their only direct means of trading offshore stocks, and international investors access to China’s companies.

It is a win-win situation for both Xiaomi and mainland investors
He Yan, asset manager, Shanghai Shiva Investment

The weak A-share market contributed to fears among mainland regulators that Xiaomi would drain liquidity out of the Shanghai and Shenzhen bourses.

A second consideration was the rivalry between the exchanges in Hong Kong, Shanghai and Shenzhen to be the preferred fundraising destination for China’s technology companies.

Bourse operator Hong Kong Exchanges and Clearing expected it to be a matter of routine that Xiaomi would be one of the underlying stocks that could be traded by mainland investors through the connect systems. Both Xiaomi and HKEX said so during the company’s listing debut on July 9.

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Xiaomi, the world’s fourth-largest smartphone maker, was the first company with a different voting rights structure to list in Hong Kong.

Its shares shed 2.6 per cent to HK$13.64 on Friday, 19.8 per cent off its listing price of HK$17.

Additional reporting by Reuters