Link Opens Between Hong Kong and Shanghai Stock Markets

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The Hong Kong exchange rang in a pilot program with Shanghai’s exchange.Credit Bobby Yip/Reuters

HONG KONG — China took a leap into the international markets on Monday, allowing mainland residents to trade shares in Hong Kong for the first time and foreigners to invest in Chinese companies that had largely been off limits.

Investors hope the pilot program that links the Shanghai and Hong Kong stock exchanges will be the first step in an easing of tight restrictions on the flow of money in and out of mainland China, the world’s second-largest economy, behind the United States.

The so-called Stock Connect will strengthen the two cities’ roles as global financial centers and open the door for foreigners to a $4.2 trillion pool of capital. Speaking at the opening ceremony for Stock Connect in Hong Kong, Charles Li, the chief executive of the Hong Kong Stock Exchanges & Clearing, called it the start of a new era.

Orders for mainland stocks from investors in Hong Kong came thick and fast in the first few minutes of the trading day. By early afternoon, foreign investors buying stocks in Shanghai had reached the daily limit for trading of 13 billion renminbi, or $2.1 billion.

“This is the biggest milestone in China’s continuing liberalization of its markets,” said Michael Karbouris, head of business development for the Asia Pacific region at Nasdaq. “In a nutshell, the opportunity is China,” he added.

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A replica of Wall Street’s famous bronze bull statue in Shanghai.Credit Johannes Eisele/Agence France-Presse — Getty Images

The trading move, which has elevated China’s capital markets to the global stage, comes as China is quietly expanding its financial ties with neighbors like South Korea and Australia through new trade deals.

Stock Connect, first announced by Premier Li Keqiang of China in April, is significant because foreign investors have been largely locked out of China’s financial markets. Until Monday, they could trade only the stocks of certain companies listed in China through a limited program that allowed just a drip of money into the country.

Now the tap has been opened wider.

But China’s vast markets are still mostly cut off from foreign investors; they will be allowed to trade only a small percentage — the daily $2.1 billion limit — of the Shanghai stock exchange market capitalization.

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A program that allows investors to trade shares between two of China’s largest financial hubs was celebrated in Shanghai.Credit Agence France-Presse — Getty Images

Still, the development is a boon to investors, banks and brokerage firms that have positioned themselves in recent months to benefit from the rush of requests to trade stocks on both sides of the border. In recent weeks, brokerage firms such as Credit Suisse and Macquarie Securities have announced initiatives to provide new research to investors.

Hedge funds and bigger institutional investors have also been waiting at the gates, expanding their Asia teams and preparing to be the first to take advantage of Stock Connect’s debut. They were among the most active participants in transactions on the Shanghai exchange on Monday.

Chinese retail investors, on the other hand, were largely absent from trading of shares listed in Hong Kong. “Foreign institutions are better prepared, and they have been studying Asia stocks carefully,” Lu Wenjie, an equities analyst at UBS, said, adding that Chinese retail investors were unlikely to have done the same preparation work.

The Chinese government has made gestures in recent weeks to indicate it is serious about opening itself to the world. Last Monday, the central bank eased the band around the renminbi, allowing the currency to rise by the most in one day since it scrapped an informal peg to the dollar in 2010.

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A program that allows investors to trade shares between two of China’s largest financial hubs was celebrated in Hong Kong.Credit Jerome Favre/European Pressphoto Agency

And just days before the introduction of Stock Connect, China’s Ministry of Finance said that international investors would be exempt from a capital-gains tax, while also giving mainland investors a three-year grace period from paying the tax.

In a separate move last week, the Hong Kong government got rid of a daily cap on how much renminbi local residents can buy, helping to deepen the pool of currency outside China.

Stock Connect is part of a broader package of overhauls announced by President Xi Jinping last year but viewed with some skepticism after some initiatives like new and planned free-trade zones failed to take off this year.

On Monday, the financial community in Hong Kong was quick to temper high expectations as the initial gains of both the Hong Kong and Shanghai exchanges quickly fizzled and the HSCEI index, which tracks the shares of mainland Chinese companies listed in Hong Kong, fell nearly 2 percent.

Both the Shanghai and Hong Kong benchmark indexes finished the day in the red.

Brokers echoed comments made by Mr. Li of the Hong Kong exchange last week, highlighting the possibility of road bumps on Stock Connect. Referring to the two-way trading program as a historic train, Mr. Li said, “Whether the initial trains are sold out with large crowds left on the platform or the train departs with some empty seats may not be as important.”

The success of the program, he added, would be “measured in years, not days or weeks.

Correction: November 17, 2014
An earlier version of this article misstated a policy change on renminbi purchases. The Hong Kong government got rid of a daily cap on how much in renminbi its residents could buy, not the Chinese government abolishing a daily cap on how much Chinese residents could buy.