through train update

Through Train expanded to include new shares

The Shanghai-Hong Kong cross-border trading scheme will now allow investments in primary issuance and opens the door for margin finance and short selling.

The Shanghai-Hong Kong Stock Connect mutual market access programme has expanded to include primary issuance, to the delight of market participants in the two cities.

Shanghai Stock Exchange said on Friday that Hong Kong investors would be allowed to buy rights issues offered by Shanghai-listed companies, while mainland investors will be able to buy rights issues and other public placements in Hong Kong. The exchange did not specify whether initial public offerings will be included, but such offerings were specifically excluded in an earlier explanation issued by the Hong Kong exchange.

This decision to open the primary market reverses the initial idea clarified in the public consultancy draft issued in April, when securities watchdogs specifically excluded share offerings.

The Shanghai-Hong Kong Stock Connect mutual market access programme, also known as the Through Train, will take effect in October and is designed to allow investors to freely trade and settle eligible shares on the other side of the border.

“The regulators and stock exchanges in both cities decided to add related rules on rights issues to protect the interest of investors, given that to forbid rights shares subscriptions may impact shareholders’ rights and interests, even though allowing new share offerings will bring some complexity to the trial,” said the Shanghai exchange in a statement.

Bankers are excited to see more openness in both markets. “We knew the Through Train may develop further to the primary market, but we did not expect it so soon,” said a Chinese broker in Hong Kong.

A growing pie means more business for investment banks and brokers on both sides of the border.

“Some Chinese investors have already participated in IPOs or share placements in Hong Kong through offshore accounts or private banks,” a Hong Kong-based senior investment banker at a global bank told FinanceAsia. “However, this official channel in buying and offering rights shares will definitely attract more qualified investors and capital.”

Goldman Sachs estimates that there will be $3.9 trillion of primary issuance during the next 15 years and that, in addition to secondary market commissions, this will generate fees of about $360 billion of revenues.

Shanghai Stock Exchange confirmed on Friday that it would also allow Hong Kong investors to take advantage of margin financing and short selling, and clarified the rules for such businesses. It said that rules for A-share investors would be clarified later, implying the possibility of also opening this area to investors.

“The ways in which Shanghai and Hong Kong markets are doing margin financing and short selling are different and may have some risks,” said Dong Dengxin, head of the Finance and Securities Research Institution within Huazhong University of Science and Technology in Wuhan.

“However, the two markets will stick to the principles of the home market and keep some differences."

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