The authorities also have to enforce a quota, which is easier via a link. When Stock Connect was first launched a quota put an upper ceiling of RMB 300 billion (USD 44 billion) on the total investment allowed through the scheme. That quota will be abolished with the launch of Shenzhen Connect, but a daily quota of RMB 13 billion remains.
If Chinese regulatory authorities want to investigate suspected abuse, they can do so through their familiar relationships with the Hong Kong Exchange and the Hong Kong regulators.
Tax?
As of early November, one big question mark still looms: what will be the tax treatment of equities purchased via Shenzhen-Hong Kong Stock Connect? For Shanghai Stock Connect, the authorities waited until the last day before launch to announce that capital gains will not apply to stocks bought and sold via Stock Connect. The street is widely assuming the Chinese authorities will accord Shenzhen Connect the same treatment—nothing else makes sense. But without an official announcement the uncertainty lingers causing delays with internal systems and client documentation that either can’t be completed or must contain additional caveats to take the uncertainty into account.
The Futures of Connect
Stock Connect is still being called a pilot program. It will grow and evolve in the coming months and years. The HKEX has announced that it will add ETFs to the scheme’s product suite in the near future, probably in 2017. Next on the wish list are derivatives, such as stock index, currency, and ETF futures and options. Eventually primary market listings might also be included.
Looking farther out still, one question is, what happens when China’s capital account becomes truly open, with capital free to move in and out without restriction? A scheme like Stock Connect would arguably be redundant because foreign brokers could establish direct relationships with on-shore Chinese brokers, just as they do in equity markets around the world. At that point Stock Connect might fall into disuse.
On the other hand, Stock Connect could by then be working so well, and be so well established in investors’ and intermediaries’ systems that investors just might decide to stick with the model that works. If HKEX plays its cards well Stock Connect could remain the preferred channel for investing in China’s stock market, quirky, unique, but effective.
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