11 March, 2016
Following the launch of the Shanghai-Hong Kong Stock Connect (Shanghai Scheme) programme in November 2014, a scheme that allows investors with access to one market to buy and sell eligible shares listed on the other market, the Chinese government has indicated its intention to set up further connect schemes to open up China's tightly controlled financial market. While the feasibility of a proposed programme to link Shanghai and London stock markets is being studied, a Shenzhen-Hong Kong stock connect scheme (Shenzhen Scheme) is expected to be launched this year.
Many market commentators foresee the Shenzhen Scheme will complement be Shanghai Scheme: the Shenzhen market includes a larger variety of small and medium sized companies compared to the Shanghai Stock Exchange, which mainly lists state-owned enterprises and large sized corporations. The next wave of PRC-linked investment products are likely to be equity funds making use of both stock connect schemes, creating a more balanced range of RMB denominated investment products.
To cater for the implementation of the Shanghai Scheme in 2014, a number of fund houses added relevant disclosures to offering documents and, depending on the level of investment in China A Shares, sought the SFC’s prior approval for Hong Kong authorised funds to investment in China A Shares. In short, according to the SFC’s FAQs issued in relation to the Shanghai Scheme, a product issuer that intends to invest more than 30% of an SFC authorised fund's NAV in China A Shares is advised to consider whether the use of the scheme amounts to a material change requiring the SFC's prior approval. If a fund invests between 10% to 30% of its NAV in China A Shares, the SFC's prior approval is not required. However, in most cases, affected investors should be notified of the changes and the fund's offering documents should be updated.
It is expected that enhancements to the Shanghai Scheme, such as increasing quotas and expanding the range of stocks involved, will be introduced at the same time as the Shenzhen Scheme. Therefore, the stock connect disclosures will need to be further updated, or drafts fine-tuned, once the final rules are published.
Based on experience with the Shanghai Scheme, we anticipate that common disclosures in the offering documents for SFC authorised funds in relation to both schemes will include:
- An introductory summary of the schemes including the basic features and eligible securities
- The constraints under the quota system as well as the differences in trading days between Hong Kong and China
- Information on corporate actions and shareholders' meetings
- Local disclosure of interests requirements, and
- Restrictions on foreign investments in companies listed in China
In terms of the risks, common disclosures may cover the following:
- Operational risks, as the stock trading systems in Hong Kong and China are quite different
- Restrictions on selling A Shares imposed by front-end monitoring
- Short swing profit rules in China
- Clearing and settlement risk, and
- Regulatory and taxation risks
Industry participants will need to work closely with the SFC to enhance and develop a set of suitable disclosures once the details of the Shenzhen Scheme and revised Shanghai Scheme are announced.
For more information, please contact:
Alwyn Li, Partner, Deacons
alwyn.li@deacons.com.hk
