launch of through train

Brokers launch Stock Connect turf war

The Shanghai-Hong Kong mutual access scheme starts on November 17 and the land grab for business has begun.

Brokers finally have a date in their diary for the launch of the Shanghai-Hong Kong Stock Connect programme and the turf war has begun in earnest.

From November 17, international investors will be able to trade 568 stocks listed on the Shanghai stock exchange, while mainland investors can invest in 268 stocks listed on the Hong Kong stock exchange.

For brokers this reform means more fees for processing a greater number of trades and a seat at the table as China opens its capital markets.

“The Shanghai-Hong Kong Stock Connect is a major breakthrough in the opening up of China’s financial market and a great milestone in the development of Hong Kong as a unique gateway to the mainland and global investors,” C K Chow, chairman of the Hong Kong Stock Exchange, said on Monday.

In the banking equivalent of a land grab, a host of banks all announced measures on Monday to attract investors and grab market share from their rivals.

Citic Bank International said it would offer six-month commission-free buying of stock through the scheme and an up to 20bp discount on renminbi foreign exchange.

HSBC, meanwhile, will offer Hong Kong retail investors a one-stop platform to trade A shares, US and Hong Kong stocks under one integrated account without having to pre-register or open a separate investment account for trading A shares when the stock connect programme is rolled out.

Citi said it had combined trading, custodian and clearing capabilities, which enables the bank to settle A-share trades directly for institutional and retail clients. The bank said its investment research and analysis has expanded coverage of A shares to include more stocks trading under the program.

Hang Seng Bank and Bank of China (Hong Kong) both said on Monday they will offer incentives including temporarily dropping brokerage fees, although BoC (HK)'s lucky draw for a limited-edition gold medal is probably less of an incentive.

Goldman Sachs' analysts have estimated potential fees on the $3.9 trillion of primary issuance they think will happen over the next 15 years plus secondary market commissions at about $360 billion of revenues over the next 15 years. Given the more profitable businesses that complement basic equity intermediary activities, the business opportunity for brokers could be several multiples of this figure, they said in a report.

The scheme, also known as the Through Train, is expected to provide a short term boost to stock markets, with the Shanghai Composite index closing 2.3% up and hitting a three-year high and Hong Kong’s Hang Seng index rising 0.8% on Monday.

Trading volume on the largest A-share ETFs – CSOP A50 ETF and  iShares FTSE/Xinhua A50 China – hit 226 million shares and 308 million shares, doubling and tripling the three-month average volumes respectively.

“It [the launch of the programme] will provide a significant boost to international participation in the China equity market, providing international investors with access to the $3.9 trillion A-share market,” said Shane Gunter, co-head of equities at UBS.

However, any rally may not linger, with investors cautious as to which point they will take part, if at all.

Only 26% of investors said they would be prepared to invest in the first week after launch, according to a UBS survey at a conference held in September.  

Furthermore, the programme might already have been largely priced in to markets, with the Shanghai and Hong Kong stock markets having already surged 21% and 5.2% respectively since it was announced in April.

As of Monday, 97 brokers have participated in the market rehearsals and 73 of them have been in the process of registration. Brokers can join the programme anytime before and after the launch, according to the Hong Kong Stock Exchange.

Good timing

The scheme was expected to go live late last month but was delayed due to a lack of regulatory approval. No launch date was given at that time, which had concerned some market participants.  

“The whole trading system has entered a so-called live-production environment and got ready ahead of time,” said Charles Li, chief executive of the Hong Kong Stock Exchange. “It’s a tremendously huge project with historical meaning. Anytime is the best timing as long as it starts.”

However, some investors cautioned that Monday’s announcement of the launch date was politically driven given that Beijing has been hosting the APEC summit in the past week, the first time in 13 years.

That said, all involved have had plenty of time to prepare, regardless of a specific launch date.

One issue still to be resolved is whether capital gains tax will be charged, although Li said it would be tackled before next Monday’s launch and promised it would not be a concern. It’s the tax authorities to determine when and how to announce the resolution, said Li.

“At this stage there is no further announcement clarifying the capital gains tax issue for northbound investors but we expect the solution to this issue to be a temporary exemption,” said Jonathan Garner, an analyst at Morgan Stanley.

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