18 Jan 2017
Securities Industry in Hong Kong
- Hong Kong has one of the world's most active and liquid securities markets. There is neither control over capital movement nor capital gains or dividend income tax.
- Hong Kong’s stock market was the fourth largest in Asia and eighth largest in the world in terms of market capitalisation as of September 2016. There were 1,930 companies listed on the Hong Kong Exchanges (HKEx) in the same period, with a total market capitalisation of more than US$ 3.3 trillion.
- Hong Kong is one of the world’s most active markets for initial public offerings (IPO), with US$17.2 billion raised in the first 3 quarters of 2016.
- Hong Kong had 186 authorised exchange-traded funds (ETF) as of end-September 2016. ETF turnover reached US$35 billion in the third quarter of 2016. A scheme of mutual recognition of funds between Hong Kong and the Chinese mainland took effect from July 2015.
- After launching the “Shanghai-Hong Kong Stock Connect” in late 2014, the “Shenzhen-Hong Kong Stock Connect” was launched by the end of 2016.
Trading services of the securities industry are provided by investment banks, commercial banks, finance companies and securities brokerage companies.
Investment banks are the principal underwriters for initial public offerings (IPO). Hong Kong's highly liberal and liquid securities market has attracted many international investment banks and securities houses to build their presence here, eyeing the IPO and securities businesses.
In the secondary market, local retail customers are served mainly by local brokers and banks, whereas institutional buyers are principally served by the international brokers and investment banks.
Being the most liquid overseas market for mainland enterprises, Hong Kong is an important centre for raising capital for companies on the Chinese mainland. The majority of mainland companies seeking overseas listings have their listing in Hong Kong. As of end 2015, 943 mainland companies were listed in Hong Kong, with a market capitalisation of US$1,901 billion, or about 62% of the total.
Closer Economic Partnership Arrangement between Hong Kong and the Mainland (CEPA)
Generally, CEPA allows easier access for Hong Kong's securities and futures companies and professionals to the mainland market. In addition, CEPA also encourages, through financial services co-operation between the mainland and Hong Kong, more mainland enterprises to get a listing in Hong Kong.
In January 2014, The CEPA Supplement X took effect, allowing Hong Kong professionals (Hong Kong permanent residents who possess a licence issued by the Securities and Futures Commission of Hong Kong) applying for securities and futures industry qualifications of the mainland are only required to undertake training and pass examination related to mainland laws and regulations. Examination on professional knowledge is not required.
Currently, securities and futures services are covered by the Agreement of Trade in Services (ATIS). The agreement was signed in November 2015 between the Hong Kong government and the Ministry of Commerce. This agreement extends liberalisation of trade in services from the Guangdong Agreement (signed in 2014) to the whole of Chinese mainland.
On liberalisation measures specific to the securities market, the “participation in one and holding of one” principle is applicable to the mainland-Hong Kong joint venture securities, securities investment advisory and futures companies that are allowed to be invested in through shareholding acquisition by Hong Kong-funded financial institutions. The ATIS also explore ways to promote qualified Hong Kong companies to issue RMB bonds in the Chinese mainland stock exchanges. The ATIS operates a positive list and a negative list. Further details of the lists can be found here.
These CEPA provisions help contribute to a greater use of Hong Kong as a financial platform for mainland securities and futures companies, with the expectations of generating more cross-border business opportunities for Hong Kong and the mainland.
Qualified Domestic Institutional Investor (QDII)
In April 2006, the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly issued rules to allow qualified commercial banks to raise RMB funds from individuals and institutions to invest in overseas financial instruments. Hong Kong was the first market which mainland residents were allowed to invest via qualified mainland financial institutions. The first QDII stock-oriented fund was launched in September 2007. As of 27 October 2016, SAFE had granted respective QDII quota of US$13.8 billion to 30 banks, US$37.6 billion to 48 fund management and securities companies, US$30.9 billion to 40 insurance companies, and US$7.8 billion to 14 trust companies, totalling US$89.9 billion.
RMB Qualified Foreign Institutional Investor (RQFII)
The mainland government introduced the RMB Qualified Foreign Institutional Investor (RQFII) scheme in the second half of 2011, with an initial quota of RMB 20 billion. In March 2013, new RQFII regulations were rolled out to expand the scope of RQFII applicants, relax the source of RMB funds, simplify the application documents, and expand the permissible RQFII investments. With RQFII scheme expansion, the total quota had stood at RMB 270 billion as of end 2013. As of 27 October 2016, SAFE had approved RQFII quota of RMB515 billion.
A spate of RMB A-share ETFs was rolled out via the RQFII scheme after the second expansion of RQFII to aid the development of ETF products in Hong Kong, which quickly became one of the most popular RMB products for investors. As of September 2016 there were 39 RMB ETFs listed on the HKEx.
Shanghai-Hong Kong Stock Connect
The Shanghai-Hong Kong Stock Connect was launched in November 2014, allowing investors to access eligible Shanghai-listed shares through the HKEx (i.e. northbound trading) and eligible Hong Kong-listed shares through the Shanghai Stock Exchange (i.e. southbound trading). Currently, the respective daily quota for northbound and southbound trading are set at RMB13 billion and RMB10.5 billion. As of September 2016, the respective northbound and southbound trades were RMB61 billion and RMB127 billion.
Shenzhen-Hong Kong Stock Connect
In August 2016, China Securities Regulatory Commission (CSRC) and Hong Kong’s Securities and Futures Commission (SFC) approved in principle the establishment of the “Shenzhen-Hong Kong Stock Connect”. The SZ-HK Stock Connect was launched in December 2016 with daily quotas of RMB 13 billion for northbound trading covering 880 stocks, and RMB10.5 billion for southbound trading covering 417 stocks.
Mainland-Hong Kong Mutual Recognition of Funds
In May 2015, the CSRC and SFC jointly introduced the Mainland-Hong Kong Mutual Recognition of Funds (MRF) for implementation in July 2015, with rules on eligibility requirements, applications procedures, operational requirements and regulatory arrangements of the MRF also released. Under the scheme, funds from the mainland and Hong Kong are allowed to operate in each other’s market, which will help deepen financial cooperation between the two places, laying the foundation for a fund regulatory standard and promoting the integration and development of the Asian asset management industry.
Hong Kong’s stock market capitalisation amounted to more than US$3.3 trillion as of September 2016. Besides, IPO fund raised topped the world for the first 3 quarters of 2016 amounting to US$17.2 billion from 75 new listings. Large IPOs in this period included Postal Savings Bank, China Resources Pharma and China Merchants Securities Co. This came on the heels of raising IPO fund of US$33 billion in 2015.
Hong Kong had 186 authorised ETFs as of end-September 2016, with a turnover of US$35 billion in the same period. ETF products provide Hong Kong investors with a wide variety of geographical and product exposures, including Hong Kong, the Chinese mainland, Japan, Korea, Russia, India and emerging markets. They are in the form of different asset classes, namely equities, Asian bonds, gold, and commodities futures index.
Investors in Hong Kong securities market are well-diversified. As per a survey conducted by the HKEx during 2014/15, overseas investors accounted for 28% of total market turnover value while local investor contributed 21%. Institutional and retail investors took up 31% and 18% of the market turnover value respectively. The rest of the transaction (51%) was conducted by Exchange Participants’ principal trading.
After-hours Futures Trading (AHFT) was launched by HKEx in April 2012 in a bid to attract more European and US investors to HKEx’s derivatives market. AHFT coverage includes Mini H shares Index Futures, as well as some currency and commodity products. Details of AFHT sessions for different products can be found here.
New RMB securities products
HKEx has introduced two models to facilitate the listing and trading of RMB-denominated securities, namely Single Tranche Single Counter (STSC) and Dual Tranche Dual Counter (DTDC). STSC is the traditional model where the IPO of the stock will result in shares being traded in a single RMB counter in the secondary market. On the other hand, DTDC comprises separate but simultaneous offer and subsequent listing of shares in RMB and HKD by the same issuer, while shares of the two counters are of the same class and freely convertible. In September 2011, HKEx released guidelines on RMB-denominated follow-on offerings to enable listed companies to raise RMB funds by share placements and rights issues/open offers.
In October 2012, the RMB-traded shares of Hopewell Highway Infrastructure Ltd were listed on HKEx by way of placing under the DTDC model, which was the first RMB-traded equity security outside the mainland.
In July 2012, ChinaAMC CSI 300 Index ETF, the first RMB A-share ETF was listed on HKEx. In October 2012, E Fund Hang Seng China Enterprises Index ETF and ChinaAMC Hang Seng Index ETF, the first two Hong Kong-share ETFs on the mainland, were listed at Shanghai Stock Exchange and Shenzhen Stock Exchange respectively.
On 19 February 2014, CSOP China 5-year Treasury Bond ETF became the first ETF outside the Chinese mainland tracking the onshore bond market. The ETF has an RMB as well as Hong Kong dollar counter to allow investors to trade the units in either currency.
Internationalising the listing portfolio is the major strategy played by the HKEx. In 2012, South Korea, the State of Delaware in the US and Labuan in Malaysia were added to as acceptable overseas jurisdictions of issuer incorporation in order to further facilitate international listings. After this, there are 21 acceptable jurisdictions, in addition to Hong Kong, Mainland China, Bermuda and the Cayman Islands.
In October 2011, HKEx announced a joint initiative to form an alliance with five other exchanges from the BRICS emerging market bloc (Brazil, Russia, India and South Africa in addition to China), namely BM&FBOVESPA, Moscow Interbank Currency Exchange (now being Open Joint Stock Company MICEX-RTS after its merger with RTS Group), the National Stock Exchange of India (NSE), BSE Ltd, and the Johannesburg Stock Exchange (JSE). The first initiative was the cross-listing of their benchmark equity index derivatives. In March 2013, they began cross-listing of benchmark equity index derivatives on each other’s trading platforms.