Introduction
On 11 August 2023, the China Securities Regulatory Commission (“CSRC“) and the Hong Kong Securities and Futures Commission (“SFC“) made a joint announcement on the introduction of block trading (manual trades) under the mutual stock market access arrangements between the Mainland and Hong Kong.
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Background
Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect (collectively, “Stock Connect”) launched in 2014 and 2016, respectively, have enabled investors from the Mainland and Hong Kong to trade shares listed on each other’s market. Such mutual market access has been facilitating the opening-up of China’s capital account and Renminbi internationalisation. In 2022, the scope of eligible stocks under Stock Connect was expanded to include exchange-traded funds (ETFs), international companies primarily listed in Hong Kong, and a larger number of Shanghai and Shenzhen-listed companies.
Nevertheless, block trading is currently not available to participants under the Stock Connect regime while offshore investors can only engage in block trading through the Qualified Foreign Investor (“QFI”) scheme. Since many Stock Connect participants do not have a QFI licence to access block trading, they could only execute a large-sized transaction by way of separate transactions, which could take long time to complete and lead to price slippage.
The new Stock Connect arrangement
The new arrangement introduces block trading to Stock Connect under which investors can execute large-sized transactions at privately negotiated prices, which in turn minimises the price impact brought by these transactions to the market via auto-matching. Under the new arrangement, offshore investors will be able to execute block trades on the Shanghai Stock Exchange and the Shenzhen Stock Exchange through the northbound trading link. Meanwhile, Mainland investors will be able to conduct manual block trades on The Stock Exchange of Hong Kong Limited through the southbound trading link.
The CSRC and the SFC will oversee the respective exchanges and clearing houses as they develop the operational and regulatory details required to launch the new block trading mechanism. Further implementation proposal and the official launch date of the new arrangement will be announced in due course, but it is confirmed that both northbound and southbound block trading will be introduced at the same time.
Analysis and takeaways
By including block trading as an additional trading mechanism under Stock Connect, the new arrangement could reduce the potential price impact to the market when large-sized transactions are executed. While from investors’ perspective, the new arrangement would likely enhance the price and execution certainty of large-sized transactions, which may further assist investors in better managing their asset allocation at lower costs.
It is anticipated that the new block trading facility under Stock Connect could further promote connectivity and integration between the Mainland and Hong Kong capital markets, thereby strengthening Hong Kong’s position as an international financial centre and offshore Renminbi hub which connects the Mainland and the world.
Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.
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