Unknown causes of the Shanghai Hong-Kong stock connect delay
The causes of the Shanghai Hong-Kong stock connect delay are, not surprisingly, unknown. One thing that was clear is that the fine print around some aspects of implementation and treatment of trading was decidedly, unclear. Questions had been raised about taxation, reporting…although some of these were answered, things came to a head last week when prominent investors interested in the HK-Shanghai connect asked for more time. Represented by the Asia Securities Industry & Financial Markets Association (ASIFMA), a letter sent to the HK securities regulator last week cited a lack of clarity around a number of rules including taxation of the securities and investment transactions.
China’s other inbound cross-border investment program, the Qualified Foreign Institutional Investor Program, or QFII for short, has actually never clarified tax treatment. Although trading mainland stocks technically incurs a 10% capital gains tax, the tax has never actually been collected on stocks traded through QFII. Some offshore firms have proactively collected the tax from their trades, but many have just assumed that no tax will ever be collected. Although some officials have indicated that the HK-Shanghai connect would have no tax whatsoever, it’s difficult to put any kind of trading strategy in place if you can’t actually calculate the proceeds and without clarity.
What is a bit difficult to understand is how everything from a technology perspective was set, but questions still remained about the details. It would seem that the technology connects would have been more difficult to implement than agreeing tax treatment would have been. With the HK-Shanghai connect seen as being such a critical part of the Chinese government’s plans to reinvigorate the mainland Shanghai market, it suggests that there might be other risk management challenges or post trade support questions.
Loss of confidence?
Certainly there has been a loss of confidence. Although dated, when the ‘through-train’ idea was initially brought-up in 2007-2008 (and subsequently shelved until now), we found in our ‘Betting on the Dragon’ report that domestic mainland investors were already hesitant to invest in foreign markets. Although one would assume that the respective governments did some sort of analysis to determine what demand for the HK-Shanghai connect would be, false starts like this don’t help investor confidence, or more importantly, investor interest.
Although there have been few formal pronouncements, the Chinese government can’t be happy with the situation. The connect was meant to re-invigorate the domestic market, which has been in the doldrums for years. To a certain extent, it has done the exact opposite: although still at multi-year highs, the exchange has been pulled down Monday by news of the delay. In addition, the excitement surrounding the link, and China in general, seems to have dissipated slightly.
With a property market now struggling in many cities across China and a Shanghai stock market going nowhere, regulators and the government have their work cut out for them over the next few months. Of course everything could be settled in the next two weeks and in that case, you should forget you ever read this article, but in all likelihood, it won’t be until 2015 until we see the first trade go across.