SHANGHAI China will allow cross-border stock investment between Shanghai and Hong Kong, regulators said on Thursday, a small step towards opening China's capital account and letting Chinese individuals buy foreign equities overseas.
The move represents a potential goldmine for brokerage services, and the news drove shares of securities firms sharply higher.
The China Securities Regulatory Commission (CSRC) said in a statement that the pilot scheme would allow mainland investors to trade shares in designated companies listed in Hong Kong, and at the same time let Hong Kong investors buy shares in Shanghai-listed firms.
"It's the first time individuals have been able to take money out of China to invest in equities, so that's a big breakthrough," said Stephen Green, head of research for Greater China at Standard Chartered in Hong Kong.
"The capital account is opening on both sides."
However, the small quotas and limited investment targets of the scheme underscore caution in Beijing over the risks capital outflows might pose to the economy, in light of recent mediocre economic data and a sharp decline in the yuan's exchange rate.
Some mainland analysts said that in the near term, the first phase of the programme may do more to prop up struggling Chinese stock indexes - some of the world's weakest performers in recent years - than allow significant capital outflows.
The CSRC said the designated companies available for investment would mostly be limited to Chinese firms with existing dual listings on both exchanges. In addition to dual-listed companies, Hong Kong investors will be able to buy companies listed in the Shanghai SSE180 Index and in the SSE380 Index series.
"Apparently, the move is part of the (mainland) regulator's efforts to support blue chips," said Chen Huiqin, a senior stock analyst at Huatai Securities in Nanjing. She added that the move might also might provide more liquidity that would support the resumption of initial public offerings this year, which have struggled to revive in the face of tighter cash conditions.
"Regulators are eager to push up the stock market but they cannot achieve that goal when monetary policy remains tight and the market lacks fresh funds."
The scheme will exclude foreign investment in the smaller-cap Shenzhen market, in particular volatile technology stocks on the ChinNext growth board, which have far outperformed large-cap value stocks in recent years. The programme might thus direct fresh funds into large-cap Chinese blue-chip stocks - long shunned by Chinese retail investors.
Hong Kong Exchanges and Clearing Ltd (0388.HK) said in a statement that it was still in talks with its mainland counterparts on mutual market access but that no agreement had yet been made.
The CSRC said that during the trial, Hong Kong investment in mainland stocks would be limited to an overall quota of 300 billion yuan and a daily quota of 13 billion yuan.
Mainland investment in Hong Kong stocks will be limited to a 250 billion yuan overall quota and a 10.5 billion yuan daily quota. In addition to buying dual-listed shares, mainland investors will be allowed to purchase shares in stocks making up the Hang Seng large- and medium-cap component indexes.
Hong Kong will also require mainland investors to be institutions or individuals with 500,000 yuan in their accounts.
The pilot project will launch after a preparation period of about six months, with some warning that implementation could be a significant challenge.
"This is a huge sentiment driver but the reality of how it will be implemented is yet to be determined," said James Antos, analyst at Mizuho Securities Asia.
The CSRC statement also said the move would help China's efforts to internationalise its currency, and create new investment channels for yuan held outside China.
The CSRC did not specify whether participants in the pilot would be allowed to convert yuan to Hong Kong dollars and vice versa, or whether only yuan funding could be used for the pilot.
Restricting participants to using only yuan for the investments would provide another layer of control for Beijing, but analysts said the impact on the pool of offshore yuan would be small given the quotas.
Analysts also said the liberalisation would help eliminate spreads for dual listings.
"The immediate impact is that some of the H-shares traded at huge discounts to the A-shares will get a huge boost as people expect funds to go and buy cheaper H-shares," said Kelvin Wong, senior Hong Kong & China equity analyst at Julius Baer.
The move also marks a potential winding down of an earlier pilot project, the Qualified Domestic Institutional Investor Programme (QDII), which allows individuals to purchase overseas shares - not only in Hong Kong - through domestically managed mutual funds, but which has struggled to attract domestic investor interest.
(Writing by Pete Sweeney in SHANGHAI; Additional reporting by Lawrence White and Michelle Chen in HONG KONG; Editing by Chris Gallagher)