Hong Kong exchange's move to allow Stock Connect investors to short-sell China A-shares from next week to boost turnover has attracted criticism from market players for being highly restrictive.
The city's bourse issued a circular to brokers last Thursday confirming the start of short-selling from March 2. But as with the launch of the Shanghai-Hong Kong link last November, rules over the use of short-selling have been branded unclear. It's not clear which stocks investors will be able to short.
A list of 414 A-shares eligible for short-selling was published by the exchange on January 30, but the list is expected to be updated when the new rules go live next Monday. A total of 569 A-shares are available for conventional buying and selling through Stock Connect.
Investors looking to use the new rules will face a series of restrictions over quantity and pricing. Short-selling of a particular stock on a single day will be capped at 1% of the total number of shares held by all northbound investors at the start of a trading day. Over a 10-day period the cumulative limit is capped at 5%.
Meanwhile, short-sell orders will have to undergo pre-trade checks to ensure the borrowed stocks have been delivered at least one day before sale.
Martin Corrall, chairman of the Pan Asia Securities Lending and Borrowing Association, said his biggest concern was over which firms would be allowed to lend shares. He said only Stock Connect participants, such as brokers, would be able to.
The problem is that as brokers do not hold stock inventories, it is unclear which shareholders will be allowed to lend. “In terms of who can lend, the rules exclude agent lenders who provide significant liquidity in the stock borrowing and lending markets," he said.
An executive at an industry trade body said the new rules contained too many hurdles to overcome. “The problem is that the rules are too restrictive to allow a workable short-selling regime to develop, with reasonable liquidity and a diversity of issues available to lend and borrow,” he said.
The introduction of short-selling has been expected by market participants since Stock Connect’s launch last November. System testing started in early January.
The full-scale launch is later than intended, since the bourse said in January that it tentatively expected this to go live this month.
A legal counsel at one a hedge fund said short-selling was not something to “get terribly exercised or excited about in the short term”. He noted hedge fund managers had other means of implementing strategies, and would not be in a rush to participate in the new scheme.
But Wilson Hui, executive director at Haitong International Securities Group, said that while the scheme would initially be very small, it was a constructive development for the market.
Charles Li, chief executive of Hong Kong Exchanges and Clearing (HKEx), conceded there were restrictions at a ceremony yesterday to mark the first trading day of the new Chinese new year, but stressed the local bourse would gradually improve the short-selling mechanism.
Speaking at the same event, HKEx chairman Chow Chung Kong added: “The short-selling rules under Stock Connect aim to allow investors to hedge their risks, not [take advantage of] speculative opportunities."
Stock Connect trading has increased slowly after launch on November 17 last year. Total northbound trading reached Rmb105.7 billion ($16.9 billion), or 35% of the aggregate quota, last Tuesday, the last day of trading before China started its week-long new year holidays.
Discussions are underway to expand Stock Connect to include shares in Shenzhen, and Cho said he expected the new link to be approved by the central government within a few months, with a launch this year.
Earlier this month, Li suggested increasing Stock Connect’s available renminbi quota and expanding the number of tradeable stocks. Brokers such as BNP Paribas Securities (Asia) have said such a move would encourage more foreign investors to use the trading link.