China to further facilitate connections in financial markets between mainland China and Hong Kong Special Administrative Region (HKSAR)

On 19 April 2024, the China Securities Regulatory Commission (CSRC) published five cooperative measures on a high level basis relating to the Stock Connect and the Mutual Fund Recognition regimes respectively between mainland China and HKSAR. These measures have been or will be implemented by more detailed rules intended to further enhance HKSAR’s status as an international financial centre, and to promote the coordinated development of the two capital markets.

Some key highlights of these measures include:

• Expanding the scope of stock exchange-traded funds (ETFs) under the Shanghai-Shenzhen-Hong Kong Stock Connect by liberalising the requirement against such stock ETFs on the average asset under management scale. In June of this year, Shanghai Stock Exchange and Shenzhen Stock Exchange respectively issued revised rules to implement this liberalisation.
• Eligible REITs will be included as the type of product that can be traded under the Shanghai-Shenzhen-Hong Kong Stock Connect.
• Following the liberalisation which allows offshore RMB to trade stocks listed in the HKSAR, mainland investors will be permitted to use onshore RMB to trade the stocks via southbound link under the Stock Connect.
• The Mutual Fund Recognition regime will be further optimized, and this was reflected in the draft rules issued by CSRC in June so that (i) the maximum scale of a HKSAR recognised fund that can be distributed to the mainland China investors in aggregate has been increased from 50% to 80% (among the overall scale distributed to all investors); and (ii) the investment management function of a HKSAR recognised funds can be further sub-delegated by its existing fund manager to an overseas asset manager within the same group as the foregoing fund manager.
• Supporting leading mainland China companies in each of their industries to go listing in the HKSAR stock market.

Noting that this is not the first time that mainland China and HKSAR authorities have initiated measures to facilitate the various connects between both financial markets. Earlier in February 2024, revised rules governing the Cross-boundary Wealth Management Connect Pilot Scheme in the Guangdong-Hong Kong-Macao Greater Bay Area (the GBA Wealth Management Connect) came into effect, which upgraded the GBA Wealth Management Connect regime to its version 2.0. Key developments include:

• Qualification requirements imposed on investors have been liberalised, meaning that more investors are permitted to invest via the GBA Wealth Management Connect.
• The total investment quota granted to any single investor has been increased from RMB1 million to RMB3 million, which again aims to attract more investors.
• Investors now can trade through qualified securities companies (in addition to qualified banks), and can invest into a wider scope of products than before. For example, in addition to the designated publicly-offered wealth management products and mutual funds that are permitted to be traded under the existing GBA Wealth Management Connect regime, the RMB deposit products offered by the qualified mainland China banks are now included in the northbound link. GBA Wealth Management Connect’s version 2.0 regime also expands the scope of the designated mutual funds by including mutual funds with higher risk to be traded under the northbound link. 
• Unlike version 1.0 of the GBA Wealth Management Connect which only sets out high level principles regarding the marketing and distribution requirements, the revised rules provide more clarifies on how mainland China institutions can market and distribute HKSAR wealth management connect product.  For example, they are now permitted, at their business premises or via their online platforms, to provide advisory and explanation services relating to the specific HKSAR wealth management products inquired by the investors, and (after the investment accounts are opened) to introduce new HKSAR wealth management products that are compatible to investors’ risk assessment levels to investors on reverse solicitation basis.

It is clear that, by upgrading the regimes for various connections between HKSAR and mainland China, the PRC central government aims to speed up the movement of funds (especially RMB) on a cross border basis and ultimately to promote RMB internationalisation to the next level.