Exchanges rule out expanding stock connect scheme

Domestic investors display lack of understanding of ‘stapled’ securities

China’s stock exchanges said on Saturday that they would not expand their stock connect scheme with Hong Kong to foreign firms, companies with different voting right structures and so-called “stapled” securities.

The exchanges were responding to a move in May to include the three types of securities on Hong Kong’s Hang Seng Composite Index starting from the third quarter of this year.

The Shanghai stock exchange said in a statement that it reached the decision after consulting with domestic brokerages.

“Most of the investors expressed a lack of understanding of these new types of securities,” the exchange said.

Domestic investors do not fully understand the concept of “stapled” securities and had not completely grasped the operations and financial systems of foreign companies, it said.

“These types of securities need to wait until they have reached a certain quantity and a market operation basis before they can be considered for the participation of mainland investors,” the exchange added.

“Stapled” securities are formed when two or more securities are contractually bound together to form a single unit that cannot be bought or sold separately.

The decision not to include the three types of firms means that mainland investors will not be able to invest in Xiaomi Corp, which made its debut in Hong Kong on July 9.

Xiaomi’s shares rallied more than 11 percent on Friday to close at HK$21.45 ($2.73), after a tough opening week.

The stock connect scheme, which started in 2014, links the stock markets in Shanghai and Shenzhen with the one in Hong Kong, enabling overseas investors to trade stocks on the mainland markets.

There are currently 268 stocks listed on the ShanghaiHong Kong stock connect scheme, and 417 on the Shenzhen-Hong Kong one.

The China Securities Regulatory Commission said in April that daily quotas for its Shanghai-Hong Kong stock connect and Shenzhen-Hong Kong stock connect will be quadrupled starting from May 1, China’s latest move to further open up its capital market. They will rise to 42 billion yuan ($6.29 billion) from 10.5 billion yuan, and 52 billion yuan from 13 billion yuan, respectively.

Transactions via the stock connect schemes had reached an accumulated total of 11.67 trillion yuan by the end of June, the Shanghai exchange said.