On November 17th 2014, the Shanghai-Hong Kong Stock Connect Pilot Scheme (the "Stock Connect") was launched, allowing cross-market trading between stock exchanges in Hong Kong and Shanghai.
It is a major step forward for opening up China's capital markets to foreign investors and propelling the internationalisation of RMB.
The Stock Connect, developed jointly by the stock exchanges and clearing houses in Shanghai and Hong Kong, encompasses about 800 stocks in total. Through Hong Kong Stock Exchange ("HKSE"), all Hong Kong and foreign investors now have access to the constituents of Shanghai's SSE (Shanghai Stock Exchange) 180 Index and SSE 380 Index, as well as all SSE-listed stocks that are dual-listed in Hong Kong. Similarly, through Shanghai Stock Exchange ("SSE"), Mainland Chinese institutional investors and individuals (investing more than RMB 500,000) have access to the constituents of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index, and all companies listed simultaneously in Shanghai and Hong Kong.
Further, Chinese tax authorities have issued two tax circulars clarifying the tax treatment of Stock Connect, the Qualified Foreign Institutional Investor ("QFII") and the Renminbi Qualified Foreign Institutional Investor ("RQFII"). Under these circulars, an exemption for business tax and income tax on capital gains applies to trading on Stock Connect and equity investments under the QFII scheme and the RQFII scheme, effective from November 17th 2014.
The Stock Connect also offers an alternative for UCITS (Undertakings for Collective Investment in Transferable Securities) to invest into A-shares listed on the SSE alongside the existing QFII and RQFII schemes. On November 28th, Luxembourg's financial regulator, Commission de Surveillance du Secteur Financier ("CSSF"), granted the first authorisation to a Luxembourg UCITS to trade through the Stock Connect. Besides, a fast-track procedure for filing such applications with the CSSF will apply to the Luxembourg UCITS whose investment policy already permits exposure to A-Shares, as announced by the Association of the Luxembourg Fund Industry on December 2nd. These UCITS only need to adapt their prospectus and KIID (Key Investor Information Document) to cater for the CSSF authorised access through the Stock Connect. These are the first steps toward unleashing EU-regulated funds, in particular UCITS, into the Stock Connect, since two-thirds of Europe's funds industry (about 13,000 global mutual funds) is domiciled in Luxembourg and regulated by the CSSF.
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