HKEX's response to the three types of Hang Seng Composite Index constituents not included for Stock Connect’s Southbound Trading

The Stock Exchange of Hong Kong (SEHK), a wholly owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), has noted the announcement and news release by the Shanghai Stock Exchange and the Shenzhen Stock Exchange on 14 July on inclusion arrangements for eligible securities under Stock Connect’s Southbound Trading. HKEX has the following three-point response.
 
First, the list of eligible securities under Southbound Trading has all along been announced by the Shanghai and Shenzhen stock exchanges, and the list of eligible securities under Northbound Trading by HKEX. The market has widely accepted using constituent stocks of third party indices as Stock Connect's eligible securities. The inclusions and removals of eligible stocks have been transparent, which has been a basis of the smooth operation of Stock Connect. The mechanism allows exchanges on both sides to exclude certain index constituents from Stock Connect under special circumstances but this has not happened before. 
 
Second, HKEX has had discussions with the Mainland exchanges on adjusting the list of eligible securities under Stock Connect since Hang Seng Indexes Company Limited's announcement in May regarding expansion of the scope of securities eligible for its composite index. Exchanges on both sides have agreed that foreign company shares and stapled securities will not be included in the list of eligible securities under Stock Connect's Southbound Trading for the time being.
 
Third, prior to the listing of the first company with weighted voting rights (WVR) in Hong Kong, HKEX tried to reach a consensus with the Mainland exchanges on the inclusion of WVR companies in the list of eligible securities for Stock Connect's Southbound Trading.  HKEX considers that these companies should be included as soon as possible because:
 
(1) Hong Kong market only accepts the listing of WVR companies with additional investor protection safeguards. Only established and sizable WVR companies are allowed to list and applicants must also have a high expected market capitalisation of $40 billion, which is higher than 74 per cent of current eligible securities under Southbound Trading.  (2) New Economy companies have become the new drivers of Mainland China’s economy. Capital needs of these companies should be satisfied to help the Mainland economy transform. (3) By expanding the scope of Stock Connect eligible securities, Mainland investors, who are subject to an eligibility requirement of RMB 500,000, will be able to diversify their asset allocation conveniently and take part in the growth of the new economy under Stock Connect, a scheme under the oversight of regulators of both sides and with risks controlled. (4) Over the past 25 years, the Hong Kong and Mainland markets have complemented each other, and Hong Kong always plays a key role in the country's pilot schemes. The introduction of red chips, H shares and Stock Connect are among the best examples.
 
In conclusion, Stock Connect is an important part of the opening up of the Mainland's capital market. The scheme marks the start rather than the end of a new era of opening up process. Further to the Mainland exchanges' notice this afternoon, HKEX will continue to maintain close communications with the Mainland regulators and exchanges with an aim to confirm the timetable for including WVR companies in Stock Connect's Southbound trading and to provide Mainland investors with a convenient channel to invest in new economy companies.

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