Post-Trade Issues Linger as Regulators Delay China-Hong Kong Link

Exchanges have yet to receive regulatory approval to launch the landmark trading link between Hong Kong and China, as issues over taxation and asset ownership remain unresolved.
By Joe Parsons(2147488729)
Exchanges have yet to receive regulatory approval to launch the landmark trading link between Hong Kong and China, as issues over taxation and asset ownership remain unresolved.

Hong Kong Exchanges and Clearing (HKEx), parent company of the Stock Exchange of Hong Kong, confirmed it had not yet received approval for the launch of Stock Connect despite speculation that it would go live on Monday.

“HKEx has not received the relevant approval for the launch of Stock Connect, and there is no firm date for its implementation,” HKEx states.

The venture is arguably one of the most anticipated developments of this year, marking a big step towards integrating China’s domestic market with the rest of the global financial system.

While the link is technically ready, as are some fund managers and brokers in the region, a number of post-trade issues have yet to be confirmed between the Chinese and Hong Kong regulators.

“I think one of the most important is around taxation, we haven’t heard anything from the Taxation office, so we hope the issue is clarified before the launch of Stock Connect,” says Michael Wu, country manager, China, Northern Trust.

Currently, dividends and disposal gains realised by Hong Kong individual or institutional investors from securities listed in Mainland China are not taxable.

However it is unclear whether these tax exemptions set out in the existing Qualified Foreign Institutional Investor Program (QFII) will be extended to the Stock Connect. Furthermore from the Chinese perspective, it is also unclear whether Mainland individual investors would want to trade in Hong Kong shares because it will trigger stamp duty consequences.

“But we have also been trying to understand issues over asset ownership and the enforcement of rights under the existing provisions of the Hong Kong Securities Clearing Company and the CSRC Stock Connect rules. We imagine this will require a lot of legal work in order to gain clarification for clients,” Wu adds.

Banks in the region are developing plans to help its clients access the trading link, with BNP Paribas announcing it will integrate its brokering and custodian units to allow clients to meet trading requirements set out in the program.

There has also been an emphasis on developing a solution for Northbound trading (i.e. investors in Hong Kong trading into China), something that Northern Trust is focusing on.

“We have been working with our custody team in Hong Kong to come up with a third party clearing relationship that will support the pre-delivery of securities requirement,” says Wu.

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