Source: the finishing touch of Zhongjin
Authors: Liu Gang, Zhang Weihan, Wang Hanfeng

On March 3, the Hong Kong Stock Exchange announced that the scope of interconnection stocks will be further expanded from March 13, 2023. On the same day, the Shanghai Stock Exchange and the Shenzhen Stock Exchange officially issued the "Shanghai Stock Exchange Shanghai-Hong Kong Stock Connect Business implementation measures" and "Shenzhen Stock Exchange Shenzhen-Hong Kong Stock Connect Business implementation measures", which will enter into force on March 13.

In the re-expansion of the interconnection mechanism, what is most noteworthy is that qualified foreign companies listed in Hong Kong will be included in the Hong Kong Stock Connect. This is after the progress of the launch of the Shanghai-Hong Kong Stock Connect at the end of 2014, the Shenzhen-Hong Kong Stock Connect at the end of 2015, the cancellation of the total quota of the Shanghai-Hong Kong Stock Connect in 2016, the inclusion of companies with different rights in 2019, the inclusion of Science and Technology Innovation Board and unprofitable biotechnology companies in 2021, and the inclusion of ETF products in 2022. Another important breakthrough in the connectivity mechanism is also the first time that foreign companies can directly become investment targets for mainland Chinese investors. Although the initial change has only opened a small opening (4 foreign companies), you will know the end when you see it.This change is of great significance for the connectivity mechanism itself, the opening of capital markets and capital accounts, and even the Hong Kong market, which connects Chinese capital and foreign assets.For the impact and significance of this expansion, we interpret as follows.

Detailed rules of the system: the Hong Kong Stock Connect includes foreign companies, the scope of Land Stock Link is expanded, and the adjustment buffer mechanism is set up.

• Scope of inclusion: Hong Kong Stock Connect includes foreign companies; Land Stock Link expands its scope

Southbound: Hong Kong Stock Connect includes foreign companies for the first time. This time, eligible foreign companies will be included in the Hang Seng Composite Index, that is, foreign companies in the Hang Seng Composite Index of large stocks, medium stocks and small caps with a market capitalization of more than HK $5 billion, with the exception of individual foreign companies that may have special requirements different from the existing Hong Kong Stock Connect stocks in terms of taxes and fees, corporate behavior, and so on. meanwhile,The scope of Shanghai-Hong Kong Stock Connect has been expanded to be in line with Shenzhen Stock Connect.That is, to include Hang Seng integrated small constituent stocks with a market capitalization of more than HK $5 billion.

Northward: the scope of Luke Tong has been extended to Shanghai A shares and Shenzhen Composite Index constituent stocks.

1) the benchmark of Shanghai Stock Connect expanded from the current Shanghai 180 and 380 Index to Shanghai A-share Index, while the benchmark of Shenzhen Stock Connect expanded from the current Shenzhen Composite Index and Shenzhen small and medium-sized Innovation Index to Shenzhen Composite Index.

2) due to the expansion of the scope of inclusion, in order to control the risk, the market value and liquidity requirements have been increased on the basis of the expanded index. for example, the average daily market value of not less than 5 billion yuan (previously not less than 6 billion yuan), the average daily transaction amount of not less than 30 million yuan, the proportion of suspension days less than 50% and other transfer requirements (those listed for less than 6 months are calculated according to the actual listing time).

3) to clarify the inclusion arrangements of companies with different rights in the same shares. In 2020, the first A-share company with different rights, Youke-W Science and Technology Innovation Board, was listed. The former and Huiyu Pharmaceutical-W are both A-share constituent stocks of Shanghai Stock Exchange. Although the above two companies have not been transferred this time, it is also possible to transfer A shares with different rights in the future. For non-AH companies with different rights in the same shares, it is necessary to meet the requirements that the average market capitalization is not less than 20 billion yuan and the total transaction volume is not less than 6 billion yuan after 6 months of listing and 20 trading days after listing for the first time.

• Adjustment mechanism: update adjustment mechanism of Land Stock Exchange, and set up buffer mechanism

Lu Shitong adjustment mechanism: 1) define the semi-annual regular inspection mechanism, and inspect the constituent stocks of Shanghai A shares and Shenzhen Composite Index at the end of May and November every year; previously, follow the adjustment arrangements of each benchmark index, which is not clearly defined. 2) A new monthly inspection mechanism will be added at the end of each month to investigate the components of the Shenzhen Composite Index that are newly included in the Shanghai A shares, the Shenzhen Composite Index or the Shenzhen Composite Index whose risk warning has been revoked that month.

Buffer mechanism: the call-out condition is lower than the call-in condition to avoid excessive volatility, specifically

1) Lu Shitong: during the semi-annual regular adjustment inspection, the non-AH shares will be transferred out only if the average daily market value is less than 4 billion RMB (previously less than 6 billion RMB) or the average daily turnover is less than 20 million RMB, or the number of trading days suspended throughout the day accounts for more than 50%.

2) Hong Kong Stock Connect: Hong Kong Stock Connect stocks that are not AH components of the Hang Seng Composite small share Index will be transferred out of Hong Kong Stock Connect only if the average market capitalization at the end of the month is less than HK $4 billion (previously less than HK $5 billion).

Result of expansion: Hong Kong Stock Connect included 32 companies, including 4 foreign companies, and mainland shares included a total of 529 companies.

Based on the above new rules and the results announced by the HKEx, this adjustment will bring about the following changes:

• Hong Kong Stock Connect: this adjustment will include 32 companies, includingOshudan (00973.HK) 、Samsonite (01910.HK) 、Gold World Holdings (03918.HK) 及Yanzhou Coal Australia (03668.HK) Four foreign companies. Specifically, includeSwire AG B (00087.HK) 、Sipai Health (00314.HK) 、Beijing Oriental Jingdian (00710.HK) 、Oshudan (00973.HK) 、Brilliance China (01114.HK) 、3D MEDICINES-B (01244.HK) 、mountain high new energy (01250.HK) 、Gao Wei Electronics (01415.HK) 、New Special Energy (01799.HK) 、Samsonite (01910.HK) 、Shangmei (02145.HK) 、minimally invasive brain Science (02172.HK) 、Xintai Medical (02291.HK) 、giant creature (02367.HK) 、high vision medical (02407.HK) 、Standard Chartered PLC (02888.HK) 、Longguang Group (03380.HK) 、Yanzhou Coal Australia (03668.HK) 、Kingsoft Cloud Holdings (03896.HK) 、Gold World Holdings (03918.HK) 、Feitian Cloud (06610.HK) 、Emmy Vaccine (06660.HK) 、Hong Jiu Fruit (06689.HK) 、Star Chinese (06698.HK) 、06929.HK (karma) 、Boan Bio-B (06955.HK) 、Lemeng Film and Television (09857.HK) 、Jianshi Technology-B (09877.HK) 、tinker Bell Health (09886.HK) 、MINISO Group (09896.HK) 、Zhiyun Health (09955.HK) 和Wei long (09985.HK) 等。

On the contraryTianyu Real Estate (00059.HK) 、Sun Hung Kai Properties (00016.HK) 、Zhou Shengsheng (00116.HK) 、Jiahua International (00173.HK) 、Shun Tak Group (00242.HK) 、everyone Lok Group (00341.HK) 、IGG (00799.HK) 、Time China Holdings (01233.HK) 、China Everbright Green (01257.HK) 、Baoxin Finance (01282.HK) 、Yuzhou Group (01628.HK) 、Australian excellent (01717.HK) 、New higher Education Group (02001.HK) 、GOGOX (02246.HK) 、Xiangsheng Holdings Group (02599.HK) 、Rongxin China (03301.HK) 、Zhengrong property (06158.HK) 、Yongtai Bio-B (06978.HK) 、Deqi Medicine-B (06996.HK) 和Cloud Music (09899.HK) A total of 20 companies have been moved out of the Hong Kong Stock Connect in this round.

• Lu Shitong: at the level of Shanghai Stock Connect, this total includesSino-Portuguese shares (600084.SH) 、Castle Peak Paper (600103.SH) 与Vico Technology (600152.SH) 309 companies were included in the Shanghai Stock Exchange after they met the requirements of expanding the scope of eligible stocks for interconnection. However, 298 companies, including Huangshan Tourism, Sheng Jitang and Wei Wei shares, have been transferred from Shanghai Stock Connect to the Shanghai Stock Connect Special Securities / Zhonghuatong Special Securities list (only for sale). At the level of Shenzhen Stock Exchange, this expansion includesPagoda Industry (000595.SZ) 、Yingfang Micro (000670.SZ) 与Xi'an Diet (000721.SZ) Among them, 220 companies are eligible to join the Shenzhen Stock Exchange. But others includeShenzhen property A (000011.SZ) 、Zhuhai Port (000507.SZ) 与Guangzhou 000523.SZ) 216 companies were transferred from Shenzhen Stock Tong to Shenzhen Stock Tong Special Securities / Zhonghua Tong Special Securities list (can only be sold).

The significance of including foreign companies: the new stage of opening up, foreign companies becoming the direct investment targets of mainland investors for the first time, and it is of great significance to the opening of the capital market and Hong Kong.

Although not many foreign companies have been included for the first time, only Oshudan, Samsonite, Golden World Holdings and Yanzhou Coal Australia, its significance and impact are far-reaching, and it is also a new stage of interconnection mechanism and capital market opening.

• Further optimization and improvement of the interconnection mechanism. Since the opening of the interconnection mechanism in 2014, the number of targets covered in both directions and the market value of stocks have increased one after another, and funds in the north-south direction have accumulated inflows of about 2.2 trillion and 1.9 trillion yuan respectively into the Hong Kong stock market and the A-share market, becoming an important part of the market investor structure.

  In this process, the connectivity mechanism has also been continuously optimized and improved. The inclusion of Hong Kong Stock Connect into foreign companies is another important breakthrough in the connectivity mechanism since the opening of the Shanghai-Hong Kong Stock Connect at the end of 2014, the Shenzhen-Hong Kong Stock Connect at the end of 2015, the inclusion of companies with different rights in 2019, the inclusion of unprofitable biotechnology companies in 2021 and the inclusion of ETF products in 2022, and further broadened the channels for Chinese residents to allocate the Hong Kong stock market.

  We believe that the two-way expansion and reform of the Shanghai-Shenzhen-Hong Kong Stock Connect is not only conducive to enriching the variety of trading products, expanding the scope of investment and enhancing transaction activity, but also is of great significance in promoting the integration of the capital markets of the two places and accelerating the opening up of China's capital market to the outside world.

• For the first time, foreign companies have entered the scope of direct investment by mainland Chinese investors, which is also a new stage of the opening of the capital market. In recent years, with the residents' asset allocation ushering in an inflection point, the demand for residents' allocation of overseas assets is also increasing. In this context, on the basis of traditional QDII/RQDII, mechanisms such as mutual recognition of funds between the mainland and Hong Kong have continuously broadened the channels and choices for domestic investors to allocate overseas assets. However, there are more or less problems such as quota restrictions, the need to buy fund allocation and pay more attention to overseas-listed Chinese assets, making it impossible for investors to invest in foreign companies in a simple and efficient way.

  The inclusion of foreign companies through the Hong Kong Stock Connect has changed this situation, enabling mainland investors to invest directly in foreign companies through the Hong Kong Stock Connect for the first time, bringing a new investment direction for mainland investors to allocate overseas assets. it opened a new chapter in the two-way opening of the capital markets of the two places.

• Under the existing mature mode of Chinese assets + foreign capital, the breakthrough of Chinese capital + foreign assets is conducive to the further two-way opening of the capital account. At present, Hong Kong's Chinese capital stocks (H shares + red chips + Chinese private stocks) have accounted for more than 70 per cent of the total market capitalization of Hong Kong stocks. Hong Kong has become one of the main destinations for listing and financing of Chinese enterprises. Coupled with mechanisms such as Lu Shitong and QFII, the "Chinese assets + foreign capital" model of overseas capital investment in China has become increasingly mature.

  By contrast, the "Chinese capital + foreign assets" invested by Chinese funds overseas is still in its infancy. The inclusion of foreign companies is an important step in this model, which could also become an important driver for foreign companies to choose Hong Kong as their listing location, especially for multinationals whose operations are mainly in Greater China.

  First of all, after foreign companies are included in the Hong Kong Stock Connect, they can introduce Chinese capital and link up with mainland capital, which is conducive to enhance the multi-dimensional financing capacity of companies.

  Secondly, the inclusion of foreign companies into Hong Kong Stock Connect has rapidly narrowed the gap between mainland investors and foreign companies, not only bringing foreign companies into the investment vision of mainland investors, but also promoting the products of foreign companies into the consumption choices of mainland residents. enable domestic investors to share the growth dividends of multinational corporations in China.

  Finally, the breakthrough of the "Chinese capital + foreign assets" model will also continue to strengthen and deepen the financial links between China and the world, and promote the two-way exchange of capital accounts.

• As the connecting point and the first stop between China and overseas, Hong Kong's status as an international financial center will be further strengthened. Compared with other international financial centers, Hong Kong's greatest advantage comes from relying on the geographical advantages and factor resource endowments given by the mainland's "big market". It is a "super contact" between China and the world. In recent years, the continued inflow of southbound funds has effectively boosted the trading activity of the Hong Kong stock market and injected new vitality into the market liquidity. With the inclusion of foreign companies in the Hong Kong Stock Connect is expected to attract more overseas companies to list in Hong Kong, superimposing opportunities such as the return of Chinese stocks and the listing of mainland enterprises in Hong Kong, the structure of the Hong Kong stock market is also expected to be further optimized.

  On this basis, Hong Kong will be able to give full play to its unique advantage of "relying on the motherland and connecting the world" in the capital market, attracting more capital, including southbound capital, and high-quality companies to settle in Hong Kong. form two-way positive feedback between high-quality companies and capital in the Hong Kong stock market, and further consolidate Hong Kong's position as an international financial center.

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