China's domestic markets remain largely closed to overseas investors, who can only gain access through a twin quota system that allows foreign funds to bring US dollars or renminbi onshore to buy mainland equities and bonds. Although the current regulations allow for a total of $216bn of investment through these quotas, only $82bn has been granted so far, less than 2 per cent of the Shanghai market.
The new daily trading links offer an additional alternative route into China for investors with a Hong Kong trading account. In the other direction, mainland institutional investors and individuals with more than Rmb500,000 in securities and cash accounts will be eligible for the scheme, potentially adding a large source of liquidity to the Hong Kong market.
CK Chow, Hong Kong stock exchange chairman, called the trading link a "major breakthrough for the opening up of China's capital markets". The exchange operator confirmed last week that talks with Shanghai were under way.
The Shanghai Composite index rose 1.4 per cent on Thursday afternoon to a near-two month high, while in Hong Kong the Hang Seng index added 1.5 per cent.
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Chinese regulators have been trying to boost foreign participation in mainland equity markets, loosening requirements for investment licence applicants and raising the quota amount available.
Many investors have been put off, however, by the moribund performance of China's large listed companies, concerns about corporate governance, and the time-consuming and restrictive nature of the quota system.
Even so, index compiler MSCI recently announced plans to include mainland Chinese shares in its global emerging markets indices, tracked by trillions of dollars in funds around the world – a sign of increased access to the market.
Additional reporting by Jamil Anderlini in Bo'ao and Simon Rabinovitch in Shanghai