China Said to Drop Total Quota for Shenzhen-Hong Kong Link

  • Daily trading still subject to cap, people familiar say
  • State Council says it’s approved the Shenzhen connect program

Chinese authorities are planning not to impose an aggregate quota on trading via the Shenzhen-Hong Kong stock exchange link, according to two people familiar with the matter.

Daily trading will still be subject to a cap, the people said. Officials are also considering removing the overall limit for equity trades through Hong Kong’s existing link with Shanghai, one of the people said. China’s State Council on Tuesday said it approved Shenzhen’s long-planned connect program, without giving further details.

A decision to impose fewer restrictions on the Shenzhen link would signal that China’s officials, who’ve pledged to open their markets to foreign investors, are comfortable that the program won’t become a channel for funneling capital out of the mainland. Foreigners have used about half their 300 billion yuan ($45 billion) quota for buying Shanghai shares since the program began. Chinese traders have shown more appetite for investing in Hong Kong stocks, with less than 20 percent of the 250 billion yuan quota left unfilled.

The absence of an aggregate limit on investments will be "an improvement," said Michael Wu, a Hong Kong-based analyst at Morningstar Inc. "That quota was just precautionary."

Press Conference

The China Securities Regulatory Commission didn’t immediately respond to a request for comment. Hong Kong Exchanges & Clearing Ltd., which operates the city’s bourse, said it will hold a press conference at 9 p.m. local time Tuesday, hosted by Chief Executive Officer Charles Li and Chairman Chow Chung Kong.

The planned abolition of aggregate quotas was reported by the Hong Kong Economic Journal on Monday, citing unidentified funds briefed by exchange officials.

Individual investors on mainland China wanting to trade through the Shenzhen-Hong Kong link will need to have a minimum of 500,000 yuan in their accounts, according to the people.

Traders rarely used up their daily quota via the existing link. Net buying of Shanghai shares is capped at 13 billion yuan, while the limit for Hong Kong stock purchases is 10.5 billion yuan.

Rout Fallout

"Removal of the aggregate quota will not have a big impact on trading volume, which depends more on market conditions at the moment, " said Linus Yip, a Hong Kong-based strategist with First Shanghai Securities.

Investors had expected the gateway to Shenzhen to open last year, but officials held off as they grappled with the fallout from the summer’s $5 trillion equity rout and January’s botched introduction of circuit breakers. The Shenzhen Composite Index is down 12 percent in 2016.

Tuesday’s announcement had been telegraphed by officials from the mainland and the city. On Aug. 11 Charles Li told CNBC in an interview that the link with Shenzhen was “imminent.” Premier Li Keqiang in March said the link would start this year. A person familiar with the matter said a year ago that China’s State Council had signed off on the plan.

The link’s approval means "the Chinese government is really delivering on its promise to open up its markets," said Sandy Mehta, chief executive officer of Hong Kong-based advisory firm Value Investment Principals Ltd. "This continues to be a step in the right direction. Foreign investors will be looking again for stocks which they have not really been able to invest in before.”

— With assistance by Keith Zhai, and Heng Xie

Before it's here, it's on the Bloomberg Terminal.