Introduction

The Primary Equity Connect (“PEC”) initiative is a key element of The Hong Kong Exchanges and Clearing Limited’s (“HKEX”) Strategic Plan 2016 – 2018, specifically to complete Mainland-Hong Kong Mutual Market connectivity of the equity market segment. The PEC aims to expand cross-border accessibility to the primary equity markets in both the Mainland and Hong Kong for mainland and global investors. This will be achieved by allowing Mainland investors to subscribe for Initial Public Offerings (“IPOs”) in the Hong Kong market via the PEC (Southbound) and global investors in Hong Kong to subscribe for IPOs in the Mainland market via the PEC (Northbound). It is believed that this initiative will be of mutual benefit to each market in view of the limited “internationalisation” development of both markets. Industry players have expressed interest in the PEC, in the belief that the initiative will improve market liquidity, expand investor base and attract sizable global IPOs. However, concerns have been raised regarding the PEC’s potential negative impact on both markets, as well as regulatory and operational complications relating to the implementation of the PEC. In response to such concerns, HKEX has released a research report seeking to elaborate and clarify the details of the PEC, to address the concerns, and to enhance public confidence and support for the initiative.

Background

HKEX has identified deficiencies currently faced by the Mainland and Hong Kong markets:

(a) A Mutual Market without primary market connectivity; and

(b) Developmental bottlenecks in Mainland and Hong Kong stock markets.

The table below summarises the deficiencies as presented by the HKEX:

In light of the above deficiencies, HKEX proposes that the mutual market connectivity model with access to the primary equity market via PEC, supplemented by access to the secondary stock market via Stock Connect, will sufficiently remedy those deficiencies. The PEC will also provide various benefits to the Stock markets on both sides of the border, and contribute to China’s wider economic strategy of attaining a balanced economy, opening up the financial market, and fully realising RMB capital account convertibility.

Implications

The PEC’s potential benefits to both the Mainland and Hong Kong markets are detailed in the table below:

However, there are legitimate concerns in connection to the implementation of the PEC. Sound market regulations for the PEC will have to be established to ensure a fair environment for investors, and to provide adequate investor protection and risk control. This may include eligibility criteria for issuers and investors, and obligations and liabilities of interested parties such as exchanges, market regulators, intermediaries, issuers and investors on both sides of the Mutual Market. Additional disclosure requirements may also need to be imposed for both IPOs under PEC (Southbound) targeting Mainland investors, and IPOs under PEC (Northbound) offered to local and global investors in Hong Kong. A coherent and well-constructed regulatory framework will ensure that regulatory incidents relating to issuers under PEC which impact investors’ interests could be minimised and resolved.

Operational concerns, such as those relating to IPO procedures and general market practices were raised:

(a) whether cross-border retail investors will be allowed to subscribe for PEC shares, or will PEC shares only be open to cross-border institutional investors;

(b) how PEC shares will be allotted to cross-border investors;

(c) whether there will be a separate subscription pool for cross-border subscription, or a combined pool with domestic market subscription;

(d) whether cross-border subscription be subject to different market rules or follow the IPO home market rules;

(e) whether cross-border investors be served by intermediaries in the IPO home market or in the investor’s market; and

(f) whether intermediaries serving cross-border investors be subject to different regulatory requirements, such as Know-Your-Client rules and placement guidelines.

For example, with regards to (a), if the PEC allows retail investors in the Mainland to subscribe for IPO shares, it may entail additional regulatory requirements for the listing company, as this will be deemed as a mainland public offering. This will foreseeably lead to increased time and costs for the listing company. Conversely, if the PEC only allows institutional investors in the Mainland to subscribe for IPO shares, the listing will be exempt from those regulatory requirements. Such operational uncertainties must be properly remedied to preserve market fairness and integrity.

It is anticipated that with considerable effort, a suitable model design catering to the best interests of the Mainland-Hong Kong Mutual Market will be able to effectively address the regulatory and operational concerns, and the PEC will be a successful endeavour benefitting both the Mainland and Hong Kong markets.

This newsletter is for information purposes only. Its content does not constitute legal advice, and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage.

Please contact our Eric Lui or Rodney Teoh for any enquiries or further information.

¹ Refer to HKEX Research Report “Primary Equity Connect – A Breakthrough Opportunity for Mainland-Hong Kong Mutual Market Connectivity and RMB Internationalisation” pp 7; and CSDC Monthly Statistics, CSDC website, December 2016
² Refer to HKEX Research Report “Primary Equity Connect – A Breakthrough Opportunity for Mainland-Hong Kong Mutual Market Connectivity and RMB Internationalisation” pp 7; and Southwest Securities research report on QFII 2017Q1 shareholding status, 1 May 2017
³ Refer to HKEX Research Report “Primary Equity Connect – A Breakthrough Opportunity for Mainland-Hong Kong Mutual Market Connectivity and RMB Internationalisation” pp 10 – 11 and Figure 7

We are delighted to announce that our Partner and Head of Litigation and Dispute Resolution Department Ms. Heidi Chui has been appointed by The Honourable Chief Justice Geoffrey Ma, the Chief Justice of the Hong Kong Court of Final Appeal as a Practising Solicitor Member of the Solicitors Disciplinary Tribunal Panel in October 2017 for a term of three years.

The Solicitors Disciplinary Tribunal deals with specific disciplinary cases brought by The Law Society of Hong Kong against any person who is, or was at the relevant time, a solicitor, a registered foreign lawyer, a trainee solicitor or an employee of a solicitor or a registered foreign lawyer of Hong Kong for alleged professional misconduct.

Ms. Heidi Chui is an Arbitrator (on the panel list of the Law Society of Hong Kong), Fellow of the Chartered Institute of Arbitrators (U.K.) and an Accredited General Mediator with both the Hong Kong International Arbitration Centre and the Law Society of Hong Kong. She is also a member of the Arbitration Committee of The Law Society of Hong Kong. She is a China Appointed Attesting Officer.

Please contact Ms. Heidi Chui for any enquiries or further information.

Stevenson, Wong & Co. is delighted to announce that we have expanded with a new main office at Gloucester Tower, The Landmark. Our Corporate, Litigation & Dispute Resolution and Private Client Departments have all relocated to the new office. Our office in Central Tower will continue to serve clients for conveyancing, employment, corporate services, intellectual property and immigration matters.

We look forward to seeing and serving our clients at our improved office surroundings.
Should you have any questions on the location of our office, please feel free to contact us.

We are delighted to announce that our Partner and Head of Litigation and Dispute Resolution Department Ms. Heidi Chui has been appointed as Expert of Professional Committee on Real Estate Arbitration of China Academy of Arbitration Law. Ms. Heidi Chui is pleased to be the Expert of Professional Committee and looks forward to collaborating with other committee members.

Ms Heidi Chui is a Fellow of the Chartered Institute of Arbitrators (U.K.) and an Accredited General Mediator with both the Hong Kong International Arbitration Centre and the Law Society of Hong Kong. She is also a member of the Arbitration Committee of The Law Society of Hong Kong.

She is a frequent speaker at arbitration events, including but not limited to Cross Strait Four Regions Young Lawyers Forum and the Belt and Road Summit organized by the Law Society of Hong Kong, seminars at Shanghai Arbitration Commission and Ningbo Arbitration Commission.

Please contact Ms. Heidi Chui for any enquiries or further information.

Stevenson, Wong & Co. is delighted to announce that it has again been recognised for its success and dedication in the legal industry by being voted “Best Corporate Commercial Law Firm – China” by APAC Insider. Each award nominee is carefully examined, with the judging panel taking into account their performance over the past 12 months to ensure that only the most deserving firms are handed one of the trophies.

About APAC Insider
APAC Insider is a United Kingdom magazine focusing on business strategy and analysis in the Asia-Pacific region.

Please contact Mr. Eric Lui for any enquiries or further information.

We are delighted to announce that our Partner, Mr. Eric Lui has been re-appointed by The Honourable Chief Justice Geoffrey Ma, the Chief Justice of the Hong Kong Court of Final Appeal as a practising solicitor member of the Solicitors Disciplinary Tribunal Panel in October 2017 for a further term of three years.

A Tribunal deals with a specific disciplinary case brought by The Law Society against any person who is, or was at the relevant time, a solicitor, a registered foreign lawyer, a trainee solicitor or an employee of a solicitor or a registered foreign lawyer of Hong Kong for alleged professional misconduct. Solicitors Disciplinary Tribunal Panel comprise of not more than 120 practising solicitors of at least 10 years’ standing, not more than 10 foreign lawyers and not more than 60 lay persons who are not, in the opinion of the Chief Justice, connected in any way with the practice of law.

Please contact Mr. Eric Lui for any enquiries or further information.