On September 30, Shenzhen Stock Exchange (SZSE) formally released eight sets of rules governing the upcoming Shenzhen-Hong Kong Stock Connect program, including the Measures for the Implementation of Shenzhen-Hong Kong Stock Connect Program, the Guidelines on the Management of Investor Suitability for Hong Kong Connect, the Mandatory Provisions for the Risk Disclosure Statement for Hong Kong Connect Trading, the Mandatory Provisions for the Client Agreement for Hong Kong Connect, the Circular on Information Disclosure by Listed Companies and Relevant Issues under Shenzhen-Hong Kong Stock Connect, the Guidelines on the Implementation of HKSCC Participation in Online Voting, and the revised Detailed Implementation Rules on Online Voting at Shareholders’ General Meetings and SZSE Trading Rules.
An official from SZSE said that SZSE has drawn on the successful experience of Shanghai-Hong Kong Stock Connect when drafting rules for Shenzhen-Hong Kong Stock Connect. The structure and main contents of the rules are largely consistent with that for Shanghai-Hong Kong Stock Connect. Meanwhile, the rules highlight SZSE’s characteristics as a multi-tiered capital market by expanding the scope of eligible shares and introducing market capitalization as a screening criterion to prevent the risk of cross-border market speculation and manipulation of small- and mid- cap shares. On top of that, in light of the actual operation experience of Shanghai-Hong Kong Stock Connect, SZSE adopted input from market on the rules and after communication with all the parties concerned, finalized and released the SZSE-level rules. These rules set out the basic model, trading and settlement mechanisms and regulatory requirements for Shenzhen-Hong Kong Stock Connect, clarify the specific requirements on client management by securities companies such as investor suitability management and trading risk disclosure, and fixed the various arrangements for regulation of information disclosure by listed companies under Shenzhen Connect and the relevant persons with disclosure obligations as well as the issues regarding HKSCC’s exercise of shareholders’ rights as a nominee and SEHK subsidiary’s participation in trading as a trading participant in the context of different rules and shareholder structures in Shenzhen and Hong Kong markets.
Among others, as the eligible shares for Hong Kong Connect include part of the constituents of Hang Seng Composite SmallCap Index which generally are small in size with unstable performance and volatile stock prices, the Mandatory Provisions for the Risk Disclosure Statement for Hong Kong Connect Trading place special emphasis on the following risks: firstly, in consideration of the expansion of the scope of eligible shares, requesting investors to note the risk that there may be significant fluctuations in the fundamentals and share prices of some small- and mid- cap companies; secondly, given the existing differences in both rules and systems between Hong Kong and Shenzhen stock markets, noting that due to a lack of delisting risk alerts and pre-delisting arrangements in the Hong Kong market, there exists the risk that shares may be suspended from trading for long or delisted directly and nominee services are likely to be restricted for delisted shares; thirdly, summarizing the characteristics of the so-called “cheating shares” (meaning refinancing instruments like deeply discounted rights issues and share consolidations, in Chinese: Laoqiangu), which have caught market attention lately, after analyzing typical cases, and drawing investors’ attention to the risks that investors’ interests may be damaged as a result of deeply discounted rights issues, placements, and frequent share splits and consolidations by some poor performing, low priced listed companies.
In addition, in order to further regulate information disclosure by listed companies and relevant persons with disclosure obligations under Shenzhen-Hong Kong Stock Connect and fully protect domestic investors’ legitimate rights and interests, the Circular on Information Disclosure by Listed Companies and Relevant Issues under Shenzhen-Hong Kong Stock Connect further specifies the arrangement for regulation of information disclosure, including overseas investors’ exercise of shareholders’ rights, disclosure of the top ten shareholders in periodic reports, disclosure of overseas investors’ interest changes, etc., and clarifies the trading suspension and resumption arrangements for A+H companies as well as the principle of compliance with more onerous and stringent disclosure requirements when disclosing the same event in the two markets that have different disclosure rules.
From August 26 to September 9, SZSE had solicited public opinions and comments from market and the relevant trading and clearing participants on the Measures for the Implementation of Shenzhen-Hong Kong Stock Connect Program, the Guidelines on the Management of Investor Suitability for Hong Kong Connect, the Mandatory Provisions for the Risk Disclosure Statement for Hong Kong Connect Trading and the Mandatory Provisions for the Client Agreement for Hong Kong Connect and received 91 responses from brokerage houses, the Securities and Futures Commission of Hong Kong (SFC), the Stock Exchange of Hong Kong Limited (SEHK), law firms and individuals. The respondents generally accept these rules and they also proposed some good opinions and suggestions for optimizing and refining these rules. SZSE adopted 41 responses after careful study and made improvements to the relevant rules.
Among others, SZSE revised 13 articles of the Measures for the Implementation of Shenzhen-Hong Kong Stock Connect Program based on 25 responses (relating to 18 areas), added 5 articles to and revised 8 articles of the Mandatory Provisions for the Risk Disclosure Statement for Hong Kong Connect Trading based on 15 responses (relating to 10 areas), and added 1 article to and revised 17 articles of the Mandatory Provisions for the Client Agreement for Hong Kong Connect based on 46 responses (relating to 42 areas). The responses adopted by SZSE mainly concentrate on increasing risk disclosure in respect of the areas of particular concern, clarifying specific operations based on actual business operation and refining phrasing of rule clauses. As for other suggestions such as lowering or scraping the investor suitability requirements for Hong Kong Connect investors and adjusting dividend tax, SZSE will study and deal with them in due course in conjunction with the relevant parties concerned as time is ripe with the development of the market.
The official added that the promulgation of these rules indicates that the business rules framework for Shenzhen-Hong Kong Stock Connect has been in place and the basic institutions have become systematic. Next, SZSE will, under the unified arrangement and leadership of China Securities Regulatory Commission (CSRC) and in close collaboration with relevant parties concerned, proceed with various business and technical preparations in a down-to-earth manner, deepen market organization, investor education and business training and go all out to ensure the smooth launch and safe operation of Shenzhen-Hong Kong Stock Connect program.