Introduction
The Shanghai-Hong Kong Stock Connect (Stock Connect Scheme) is a pilot program for establishing mutual stock market access between Mainland China and Hong Kong. For a comprehensive overview and analysis of the unresolved issues in the rules and operations of the Stock Connect Scheme, please click here.
The Stock Connect Scheme was expected to go live on 27 October 2014. However, on 26 October 2014, the Hong Kong Exchanges and Clearing Ltd (HKEx) issued an announcement indicating that it has not received approval from the Chinese regulatory authorities for its launch. No information was provided as to the length of the delay or the intended launch date of the Stock Connect Scheme.
Status of the Stock Connect Scheme
Background
It was previously announced that the Shanghai Stock Exchange intended to run two pre-launch technology tests for system readiness on 11 October 2014 and 18 October 2014, with a final full trial to be completed on either 25 or 26 October 2014. Furthermore, Charles Li, Chief Executive of HKEx, indicated that the Stock Connect Scheme would be launched on a Monday. Based on the information above, it was anticipated by industry insiders that the Stock Connect Scheme would be launched on 27 October 2014.
As HKEx promised to give two weeks advance notice of the launch date, speculation of a delay of the Stock Connect Scheme arose when no such notice was given on 13 October 2014. These rumours were fueled by an announcement by HKEx, on 21 October 2014, that the pre-launch system readiness tests would only be confirmed upon the announcement of the launch date.
Latest Status
On 26 October 2014, HKEx announced that, although the Stock Connect Scheme is technically ready to be implemented by all the relevant parties, HKEx had not received the relevant approval for the launch of the Stock Connect Scheme from Chinese regulatory authorities.
Speaking to the media on 27 October 2014, Charles Li declined to give a timetable for when approval might be granted, but he stated that he hoped that the launch date would be soon.
This hope was echoed by Ashley Alder, Chief Executive of the Securities and Futures Commission (SFC), on 28 October 2014, who noted that the SFC had completed all the regulatory steps needed for the launch of the Stock Connect Scheme and that he hoped that trading would begin "in the not too distant future", but did not provide a timeframe for the launch.
As of the date of this alert, the Chinese authorities have not provided an explanation as to why the Stock Connect Scheme missed its widely expected launch date of 27 October 2014.
Possible Reasons for Delay
Capital Gains Tax Issue
According to market professionals speaking at a Reuters China Summit, the failure to reconcile the differences in capital gains tax in Hong Kong and Mainland China is a critical reason for the delay of the Stock Connect Scheme launch.
Under existing tax laws in China, a 10% tax is normally levied on unrealized and realized capital gains, a 5.6% tax is also levied on business profits and in contrast, Hong Kong does not charge capital gains tax. Historically, China had not enforced the capital gains tax against investments under the QFII or RQFII programs.
In a technical briefing in May 2014, the HKEx stated that the issue on capital gains tax was subject to clarification from the State Administration of Taxation in China, however there has been no definitive statement released from the relevant Chinese tax authorities on this issue as of the date of this alert.
Occupy Central Campaign
Given the statement from HKEx that the Stock Connect Scheme is technically ready to be implemented, many industry insiders have linked the delay of the Stock Connect Scheme to the recent Occupy Central campaign in Hong Kong.
Charles Li stated that the Occupy Central campaign may have been a reason for the delay in the launch of the Stock Connect Scheme. He also stated that, although the financial market is stable at the moment, the financial services sector would be affected if the movement continues.
Conclusion
Currently, there is no information as to when the Stock Connect Scheme will be formally launched. We will publish further alerts on this topic when reliable information becomes available.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
