Shanghai- Hong Kong Securities Market Connect and Future Connects between China and Asian Countries ---From the perspective of CSDs Nov.4, 2015 China Securities Depository and Clearing Corporation Limited Dr. DAI Wenhua

2 Contents Institutional Framework of SH-HK Stock Connect Operational Features of SH-HK Stock Connect Significance of SH-HK Stock Connect Food for Thinking    

3 Institutional Framework of SH-HK Stock Connect 

4 Nov.17, 2014 Official Launch of SH-HK Stock Connect

5 Closed Loop of Settlement Cycle and Capital Flow Clearing and Settlement in Net for Minimum Cross-boundary Capital Flow “Home market Principle” is preferred All RMB Conversion in HK to Promote Cross-border Usage of RMB “Minimum cost principle”, which means the settlement cost will not be collected twice. “ Risk segregation principle” between the two markets Regulatory Cooperation between CSRC and SFC Trading Links between SSE and SEHK Clearing Links between CSDC and HKSCC Three Components + + Institutional Framework of SH-HK Stock Connect Quota Applied for Smooth and Stable Launch

6 Operational Features of SH-HK Stock Connect 

7 Buy trades volume Sell trades volume

8 Operational Features of SH-HK Stock Connect(Continued) Buy trades volume Sell trades volume

9 Nov Jun Hang Seng Index Shanghai Composite index Operational Features of SH-HK Stock Connect(Continued) Trends of Shanghai and Hong Kong Stock Markets

10 Operational Features of SH-HK Stock Connect(Continued) Northbound Net Buy Trade VolumeSouthbound Net Buy Trade Volume

11 Operational Features of SH-HK Stock Connect(Continued) Mainly institutional investors Blue chips, A share rare stocks Northbound Trade Mainly individual investors Stocks related to finance, manufacturing industry, information technology industries Southbound Trade  Investors inherit their own trading habits from their own markets.

12 Operational Features of SH-HK Stock Connect(Continued) Northbound average daily trading volume is 7 billion RMB(USD 1.1 billion) Barely touch the daily trading quota Southbound average daily trading volume is 2.8 billion RMB(USD 0.44 billion)  Trading is more rational than expected. Trading QuotaNorthbound TradingSouthbound Trading Aggregate Quota (AQ)RMB 300b (USD 48.8b)RMB 250b (USD 40.6b) Daily Quota (DQ)RMB 13b (USD 2.1b)RMB 10.5b (USD 1.7b)

13 Operational Features of SH-HK Stock Connect(Continued) Heated Northbound trade VS Cool Southbound trade Heated Northbound trade VS Cool Southbound trade  Northbound trading volume is 2.5 times as much as that of Southbound trading.  Northbound trading reached the daily trading limit for 8 times.  Southbound trading reached the daily trading limit for 2 times.  Northbound trading has been quite active.  Since April, Southbound trading has been improved remarkably — daily trading volume is 978 million RMB — daily trading volume is trillion RMB

14 Operational Features of SH-HK Stock Connect(Continued)  Successful implementation of clearing, currency exchange, settlement and corporate action.  Steady exchange of clearing data.  Smooth settlement process, sometimes delayed delivery of stocks.  Currency exchange is widely acknowledged by the market.  Cross-border money transfer is smooth.  Southbound corporate actions are properly and quickly handled.

15 Significance of SH-HK Stock Connect 

16 Significance of SH-HK Stock Connect Significance 1 Facilitate the domestic and international investors to invest in A share and H share markets. 2 Promote the common development and prosperity of two capital markets. Promote the common development and prosperity of two capital markets. 3 Consolidate Hong Kong’s status as the international financial center. Consolidate Hong Kong’s status as the international financial center. 4 Speed up the construction of Shanghai as the international financial center. Speed up the construction of Shanghai as the international financial center. 5 Act as a signal of deepening the openness of mainland capital market. Act as a signal of deepening the openness of mainland capital market. 6 Promote the RMB internationalization.

17 Significance of SH-HK Stock Connect(Continued)  It’s beneficial to promote A share to be included in MSCI In dex and speed up the opening of mainland capital market. June. 9th Sept. 7 MSCI:A share will be included into MSCI sooner than expected.

18 Food for Thinking on SH- HK Stock Connect 

19 Food for Thinking on SH-HK Stock Connect  Challenges  1. Institutional linkage– NOMINEE system Mainland market acknowledges nominee system and international investors enjoy the rights and interests of A Share. International investors can realize most of their shareholders’ rights. Yet some of shareholders’ rights can not be achieved---being directly shown on shareholders’ list. Solution ： directly opening account in the name of international investors in mainland China?

20 Food for Thinking on SH-HK Stock Connect  2. Whether or not to provide shareholding data of mainland investors to Hong-Kong listed companies? Hong Kong Securities and Futures Ordinance---Issuers enjoy the investigation rights on the shareholding status. Securities Law of the People’s Republic of China---CSDC has the obligation of confidentiality on the investors’ account information. Legal feasibility CSRC is deliberating on this issue. To Refuse? To Provide?

21 Food for Thinking on SH-HK Stock Connect(Continued)  3. Currency exchange cost of southbound investors At present --- “Daily currency exchange for the netting volume(buy trade minus sell trade), the exchange cost shared by all the investors(in the buy and sell trade)” If investors have multiple tradings on T+0, the exchange cost will be increased. Improve or not?  4. Risk management is more complicated. Liquidity risk Daily limit: liquidity risk is controlled to a certain extent. Cross-border capital transfer Typhoon, black rainstorm Operational risk much manual processing of Southbound corporation actions

22 Food for Thinking on SH-HK Stock Connect (Continued)  4. Risk management will be more complicated(continued). Correlation between Mainland and Hong Kong markets is stronger. May Sept Shanghai Composite index Hang Seng Index

23  5. Bigger-scale buy-in and sell- out, which can influence investors psychologically.  6. Too much expectation and wish to regard each other as the market’s Savior.  7. Pose new challenges to regulatory bodies. Food for Thinking on SH-HK Stock Connect (Continued)

24 Food for Thinking on SH-HK Stock Connect (Continued)  “Expand the opening of the capital market in both directions” --- Several opinions on further promoting the healthy development of Chinese capital market by the State Council  “We will promote the opening of the capital market in both directions, raise the convertibility of cross- border capital and financial transactions in an orderly way.” ---Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform (Passed on the Third Plenum of the Chinese Communist Party’s 18th Congress)  " One belt, one road "Strategy  In the pipeline  Shanghai- Hong Kong stock connect is not perfect, yet the model is feasible.  Expand the openness of Chinese capital market and achieve linkages with more Asian countries.

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