GEARING UP FOR TRADING IN CHINA'S MARKETS .
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Bankers , brokerage firms and hedge funds have all been
quietly expanding their Asian operations to take advantage of
one event : the biggest opening into China in years .
China plans to connect the Shanghai stock exchange to its
counterpart in Hong Kong over the next month as part of an initiative
announced this year by Premier Li Keqiang to open China's markets to foreign
investors who have been largely shut out . The move will allow foreign investors
to trade the shares of companies listed on the Shanghai stock exchange directly
for the first time , and let mainland Chinese investors to buy shares in
companies listed in Hong Kong .
The potential rewards of an open market between the two , are enormous for
investors .
Currently , the only way for foreign investors to trade Chinese stocks , is
indirectly through a limited quota program that allows
a trickle of foreign money into the country .
Among those preparing for the new pipeline into mainland
markets is O'Connor , the $5.6 billion hedge fund owned by UBS,
which has been expanding its presence in Asia .
The program called Shanghai-Hong Kong Stock Connect , will create the
second-largest equity market in the world in terms of the market value of the
combined listed companies .
It is also going to create a much more efficient way for the global
marketplace to value many Chinese companies , and this attribute alone makes the
market more attractive .
The formal starting date for the program has not been announced , but
officials have been aiming for sometime next
month . Employees at brokerage firms across Hong Kong have been
participating in mock trading sessions to test their readiness for the new
program .
The wide-open connection will allow hedge funds like O'Connor
to expand their business between the two exchanges and trade directly .
Still challenges remain , and some significant questions have not been answered
.
The program is part of a broader package announced last year
by President of China Xi Jinping .
Critics point to other initiatives , like the building of new and planned
free trade zones , that have been slow to take off .
And while foreign and Chinese investors will have the chance
to invest in hundreds of companies that were previously off limits , they
will still be limited by quotas .
The combined two-way yrading volume will be capped at 23.5
billion reminbi , or about $ 3.8 billion , approximately 20% of the
combined average daily trading volume on both markets .
Individual mainland Chinese investors will need at least
500.000 renmimbi in their brokerage account to buy Hong Kong
shares , a threshold that excludes most retail investors .
Foreign buyers of Shanghai stocks will not be able to buy shares and sell
them on the same day .
It is still unclear whether they will be allowed to buy shares using
marging financing or to engage in short-selling , a bet that a stock will
decline .
And in another hurdle , all trades will be settled in renmimbi ,
introducing additional risk for foreign investors .
There are also unresolved issues over taxes .
Foreign investors in mainland China's stock markets are technically liable
for paying capital gains taxes , but China has historically not taxed such
investments under the existing quota plan . It remains an open question whether
that practice will change .
Given these uncertainties , companies like MSCI - which compiles indexes
that are tracked by funds with trillions of dollars invested in stocks around
the world - have so far declined to include mainland Chinese shares in their
indexes ...
