Investors in Hong Kong and Shanghai will soon be able to trade shares in each other's equity markets, a significant development in China's broad efforts to open up its financial system to the world.
Under a pilot scheme unveiled by regulators on Thursday, Hong Kong-based investors will be permitted to buy up to Rmb13bn ($2.1bn) a day of Shanghai-listed stocks, while mainland Chinese investors will be allowed to trade up to HK$13.2bn of Hong Kong shares daily.
That compares to average daily trading volume last month in Shanghai of Rmb400bn and of HK$71.4bn (US$9.2bn) a day in Hong Kong.
Overall investment via the plan, which regulators aim to have up and running within six months, will be capped at Rmb300bn for funds heading to Shanghai, and at Rmb250bn for mainland investors trading in Hong Kong.
In a joint statement, Chinese and Hong Kong regulators said the scheme would include direct links for cross-border clearing, a potentially significant development for further future co-operation between the two markets.
In a sign of the political importance of the move, Chinese Premier Li Keqiang gave a speech timed to coincide with the announcement at a forum on the southern island of Hainan.
"We will actively create conditions to establish a Shanghai-Hong Kong stock exchanges connectivity mechanism, and further promote two-way opening up and healthy development of the capital markets on the mainland and Hong Kong," Mr Li said.
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.
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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