Shanghai-Hong Kong Stock Connect Turns to Short-Selling

February 24, 2015 Updated: April 23, 2016

The Shanghai-Hong Kong Stock Connect scheme has given the green light to traders to short Shanghai shares, in a statement released by the Hong Kong Stock Exchange.

Set to commence on March 2, the move comes as plans to bring about a successful trading link between Hong Kong and mainland China were offset by a lackluster performance since its November inauguration. Net inflows to Shanghai stocks yielded $16.8bn, only a third of the total quota of $48.4bn.

Fund managers have told the WSJ that the rollout for the program was too fast, despite a seven-month long preparation. Issues such as the treatment of capital-gains tax by Chinese authorities were clarified only mere days before trading opened.

Short-selling will mark the first attempt at reforming the cross boundary investment channel which sought to provide foreign investors greater access to China’s tightly controlled market. 

According to the statement, the short-selling ratio will be capped at one percent a day and no more than 5 per cent over 10 consecutive days. 

Previous talks of adding Shenzhen, China’s third stock exchange and fourth largest stock market by turnover, to the landmark program could depend on the success of the reform. In the past twelve months, the Shenzhen Composite share average has gained some 41% with an average turnover of $495bn a month in 2014, according to the Financial Times.

However, questions over pre-trade checking requirements, shareholder rights and whether investors will have beneficial ownership of SSE Shares remain pending. Although Hong Kong recognizes the distinction between legal and beneficial ownership, China’s standpoint is still unclear. 

“We understand that the market needs time to get used to the idea of beneficial ownership in shares held through a nominee in the context of Mainland law even though it is not a new concept under both Mainland and Hong Kong law,” said Christine Wong, HKEx’s Chief Counsel and Head of Legal Services.

“We are committed to making this and other concepts adopted in Stock Connect properly understood by investors and other stakeholders,” added Ms Wong on the Hong Kong Exchanges and Clearing Limited website.

The Hong Kong stock exchange resumed trading yesterday following the Lunar New Year Break. The Shanghai stock exchange will reopen on Wednesday.