HONG KONG: A watershed scheme to allow cross-trading between Hong Kong and Shanghai’s stock markets has been delayed, a Hong Kong official said on Monday, warning that pro-democracy protests gripping the city could impact the project’s progress.
The announcement hit stocks in both cities, with Hong Kong down 0.68 percent and Shanghai shedding 0.51 percent by the close.
The Shanghai-Hong Kong Stock Connect platform—which would enable international investors to trade selected stocks in Shanghai’s tightly restricted exchange and allow mainland investors to buy stocks in Hong Kong—was widely expected to launch this week.
But Hong Kong stock exchange chief Charles Li said Monday that the tie-up had been postponed, adding that the ongoing mass demonstrations demanding Beijing allow the semi-autonomous city free leadership elections could impact the future of the scheme.
“If [the protest]drags on, it’s impossible for it not to be affected. This is important for Hong Kong,” he told reporters.
But investors have also reportedly expressed concern about a lack of clarity on taxation and other issues. AFP
China’s premier Li Keqiang announced plans for the project in April and Chinese and Hong Kong authorities issued a statement that month saying it would take “approximately six months” to launch.
But in a statement issued late Sunday, the stock exchange said no start date had been set for the scheme, and it had yet to receive regulatory approval.
“There have been market expectations that Stock Connect will commence its operation in October 2014 . . . However, at the date of this announcement, HKEx has not received the relevant approval for the launch of Stock Connect, and there is no firm date for its implementation,” the statement said.
Li said the Hong Kong bourse does not have a say on when it can start—with regulators from both sides needing to give the go-ahead—although the technical infrastructure is in place.
Shen Jun, a Shanghai-based analyst with BOC International, said the project was likely to be delayed rather than scrapped altogether, as China is pushing hard to open its “A-market” of shares that are largely closed to foreign investors.
“An indefinite postponement is unlikely, as an indefinite delay means dashed hopes for the A-share market,” Shen told Agence France-Presse. “Only opening up can bring in the fresh foreign capital needed to invigorate the A-share market.”
He added: “It might be one or two months late—likely it will be launched in the second half of December.”
Confusion over tax
Media reports last week said that the Asia Securities Industry and Financial Markets Association (ASIFMA), representing some of the world’s biggest banks and asset managers, had written to Hong Kong regulators asking for a delay because of uncertainty over the scheme’s rules.
A spokeswoman for ASIFMA declined to comment on the reports.
Shen said there was confusion about whether Chinese or Hong Kong authorities would collect capital gains tax on transactions from the new scheme, among other issues.
“In such circumstances the competent taxation departments need to clarify the situation,” Shen said. “It’s possible that the competent departments are still debating over whether or not to collect capital gains tax, and this needs to be made clear.”
If it goes ahead, the scheme is expected to see volumes on both exchanges rise significantly, particularly Shanghai, but it is subject to strict limits in order to preserve capital controls in China, where Communist authorities keep a tight grip on the yuan currency.
Plans for a similar tie-up in 2007 sparked a surge in share prices in both bourses but they were eventually scrapped as the global financial crisis unfolded.
Li also told reporters at a press conference on Sunday that he felt pro-democracy activists should now retreat as prolonged protest could harm the city’s overall financial stability.
“I think retreating with pride is glamorous. I think our kids can consider that,” he added.
Thousands of protesters have taken to the streets in fury at Beijing’s insistence that candidates running in Hong Kong’s 2017 leadership election are screened by a loyalist committee, an arrangement critics have branded “fake democracy.” AFP