(Bloomberg) — Hong Kong Exchanges & Clearing Ltd. has found a way to help reverse the disappointing performance of the link between its stock market and the one in Shanghai.
The exchange operator will offer new trading accounts to fund managers as soon as March, enabling them to overcome the main obstacle stopping them from selling Shanghai-listed shares.
Chinese regulations compel international investors to deliver securities to their broker before 7:45 a.m. in Hong Kong on the day they plan to sell the shares on the mainland. Many asset managers have compliance rules that prevent them from transferring equities before they have sold the securities.
The Hong Kong Investment Funds Association said its members were also concerned that brokers could leak the details of their sell orders. Advance knowledge of an investors plans could give a rogue trader time to front-run an order, enabling them to profit from the subsequent price movement in the shares.
Once this is implemented, it will go a long way to address the concerns of fund managers, Bruno Lee, HKIFAs chairman, told reporters in Hong Kong.
The exchange link, known as Stock Connect, allows Hong Kong-based investors to buy a net 13 billion yuan ($2.1 billion) a day of shares in the largest Shanghai-listed companies. Daily purchases have fallen far short of the quota with the exception of Stock Connects opening day in November. In total, asset managers have only bought about 25 percent of the Shanghai shares available to them since the links launch.
New Accounts
HKEx will register the new trading accounts with Hong Kong Securities Clearing Co., one of its subsidiaries. That will allow China Stock Connect — the gateway for investors wanting to trade Shanghai shares — to verify the money managers holdings without forcing them to transfer the equities to a broker, according to a HKEx presentation posted on its website.
The Hong Kong exchange expects to start testing the new system in February before launching it as early as March. Hong Kongs Securities & Futures Commission needs to approve the project before it can go live. HKEx Chief Executive Officer Charles Li said in November that it would take until the middle of 2015 for the exchanges to set up a means of avoiding the early delivery of shares.
HKEx also announced that it will allow international investors to short mainland shares through Stock Connect later this month. The exchange operator will test the short-selling service this weekend. Some investors sell borrowed shares with the intention of buying them back later at a lower price, a practice known as selling short.
