The Chinese mainland is now open for business, at least in terms of its $4.2 trillion capital market. The Shanghai and Hong Kong stock exchanges are now linked giving foreign investors access to the tightly-controlled Chinese capital markets.
Stock Connect debuted on November 17, and for the first time, stocks on both markets can be traded freely, a major step in China’s roadmap to liberalize its economy.
The landmark agreement will give international investors a lot more options- 568 Shanghai-listed stocks and 268 Hong Kong-listed companies. Foreign investors will be exempt from paying taxes on capital gains (CGT). Previously, the trading of mainland Chinese stocks on the Hong Kong exchange was restricted to a few “qualified” investors.
The change was announced last April by Chinese Premier Li Keqiang as a way to increase both exchanges’ standings in global finance.
“This should increase the scale and relevance of these markets and also improve market efficiency and the robustness of China’s financial system in general,” HSBC analyst Steven Sun, head of China equity strategy, said in a report leading up to the unveiling.
A limit of $2.1 billion (13 billion yuan) worth of stocks can be bought on the Shanghai exchange per day. On the opening day, the limit was reached by mid-afternoon.
The link may soon be expanded to the Shenzhen Stock Exchange, HSBC wrote.
“Chinese investors will take Hong Kong as a place to put their long-term bets. So that’s why I think in the long-run Hong Kong will benefit from this,” Alex Wong, an asset management director at Ample Finance Group in Hong Kong, told Reuters.
Opening its markets is one of the major economic reforms China has undertaken to allow its currency to free float within the next four years.
- China is ranked 96th out of 189 economies in Doing Business 2014. Its overall score increased by three points this year, reflecting positive gains in three of the 10 sub-indicators. Significantly, China improved its credit information system by introducing credit information industry regulations. It also made it easier to enforce contracts by amending its civil procedure code to streamline and speed up all court proceedings.
- According to the latest Enterprise Surveys data (2012), the top three business environment constraints experienced by private sector firms in China include access to finance, practices of the informal sector, and tax rates. Out of 2,700 firms surveyed, 25.3% of them report having obtained a bank loan or line of credit, compared to 35.0% in the region, and 36.4% in the world.
- China’s limits on foreign equity ownership are stricter compared to the countries covered by the World Bank Group Investing across Sectors indicators in East Asia and the Pacific, and globally. It takes 18 procedures and 65 days to establish a foreign-owned limited liability company in Shanghai, China. This is slower than the Investing across Borders global average but in line with the regional average for East Asia and the Pacific. Access to industrial land is limited since land is either owned by the state and local governments, or collectively by farmers. Private land ownership is not allowed.
- China is ranked 137th in the Heritage Foundation’s Index of Economic Freedom 2014. Major economic reforms are still needed to create a more balanced and sustainable economy. In particular, the lack of political will to undertake more fundamental restructuring of the economy has led to continued overreliance on public investment. The Communist Party’s ultimate authority throughout the economic system undermines the rule of law, and institutionalized cronyism remains pervasive.*