The creation of Shenzhen-Hong Kong Stock Connect was a complex process involving many difficult issues, including some that were different from the Shanghai-Hong Kong Stock Connect, said an expert.
“A number of critical Hong Kong and Mainland China legal issues were addressed, including the finality of contracts cleared through Stock Connect and the nature of ownership of China A-shares and Hong Kong shares held through Stock Connect,” Linklaters’ capital markets partner Liew Chin-Chong, who led the firm’s team in this project, told Asia Business Law Journal’s sister publication, China Business Law Journal.
“A number of adaptations were also made to the practice of the Hong Kong market to cater for the special features/trading of the home Mainland China market, including the implementation of ‘pre-trade checking’ procedures and restrictions on ‘non-trade transfers’ in respect of China A-shares, which is novel to the Hong Kong market.”
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The Shenzhen-Hong Kong Stock Connect, kicked off in early December 2016, will create trading and clearing links that enable Hong Kong and overseas investors to trade in securities listed on the Shenzhen Stock Exchange, and Mainland Chinese investors to trade in securities listed on the HKEx.
Although similar to Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong mechanism has significant differences. According to Liew, the trading rules of Shenzhen Stock Exchange and the clearing rules of ChinaClear Shenzhen branch are separate and different from those involved in Shanghai-Hong Kong Connect.
“There is also a new category of shares known as ChiNext shares traded in the Shenzhen Stock Exchange, which can only be sold to certain types of professional investors in Hong Kong, not to the retail public,” he said.
Brokers and dealers have to develop systems to ensure that their investors, which may be direct or indirect clients, whether for cash equity or derivative positions, could comply with this requirement, added Liew. “Market participants would also have to re-consider the robustness of their risk management process and documentation given market challenges and lessons learned in July 2015.”
Legal counsel: Linklaters advised on the establishment of Shenzhen-Hong Kong Stock Connect, with its teams led by Hong Kong partners Liew Chin-Chong and Stephen Fletcher.
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