Hong Kong Exchange Pledges to Defend Investors in China

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  • Post last modified:April 2, 2015

Hong Kong Exchanges & Clearing Ltd. said it will help international investors defend their ownership rights should problems arise amid concerns about Chinese legal protections for shareholders.

The bourse amended its clearing rules last month, committing to provide certificates of ownership to investors who bought shares through Hong Kong’s exchange link with Shanghai. HKEx said it would also help investors prove their ownership of mainland stocks.

“These amendments to the rules will reinforce the interests of foreign investors,” said Marc-Andre Bechet, a legal director at the Association of the Luxembourg Fund Industry. Luxembourg is a home for investment funds with about $3.7 trillion in net assets, according to ALFI. The changes “will be definitely welcomed by investment managers.”

International funds need tangible proof they actually own the shares they’ve purchased. Such assurances had been unclear with the bourse link, established last year to give foreigners unprecedented access to the Chinese equity market. In a December report, the Asia Securities Industry & Financial Markets Association said there was no clear system for confirming who owns Chinese stocks purchased through the Hong Kong exchange.
European Funds

“Funds in the U.S. and Europe need to show that they’ve got good ownership title, they need to be able to enforce their shareholder rights,” James Fok, HKEx’s head of global strategy, said in an interview. “We are very comfortable with the fact that an investor holding their shares through HKSCC as a nominee has full and good legal title to their shares in the mainland.” HKSCC stands for Hong Kong Securities Clearing Co., which is HKEx’s clearing entity.

Executives from HKEx met fund managers from Luxembourg and Ireland last month to discuss investment through the link.

Luxembourg’s financial regulator has given eight funds permission to use the program, according to Patrick Hommel, a member of the secretariat general at the Commission de Surveillance du Secteur Financier.

Officials from the Central Bank of Ireland also met HKEx representatives, and the nation’s financial regulator may soon grant its first approval to a fund to invest through the link, according to the Irish Funds Industry Association. The IFIA’s Chief Executive Officer, Patrick Lardner, welcomed the changes, saying that they may encourage fund managers to start investing through Stock Connect.

Proving ownership of Chinese shares is so far the biggest outstanding issue that prevents many investors from using the link, said Ben Valentine, the head of pan-Asia electronic execution at Citigroup Inc. in Hong Kong.

Global investors have purchased about 41 percent of the aggregate 300 billion yuan ($48.4 billion) quota of shares available through the link.

“Make no mistake, China is the market people are focused on,” Valentine said. “Based on the assumption that all this stuff gets resolved, it’s just going to be a bigger uptick in terms of the volume that we are going to see going into China.”