Hong Kong confuses most people on whether it is a country or is part of China. A metropolis on the southern coast of China, Hong Kong is autonomous, with its currency. Hong Kong is a SAR (Special Administrative Region) of China, officially making the Hong Kong part of China.
Hong Kong was a British colony, at one time referred to as a “barren Rock” by Lord Palmerston, the former British prime minister, and foreign secretary. Hong Kong has come a long way from the barren rock, with the Hong Kong Stock Exchange trading platform ranked as Asia’s third largest as per market capitalization, after the Tokyo Stock Exchange and the Shanghai Stock Exchange. It also ranks as the world’s sixth-largest stock market. Learn more…
While trading on the Mainland and Hong Kong, you must note the differences in trading rules.
Clearing and settlement
On the mainland, shares must be settled on the day of the transaction, and money must be settled on T+one(Transaction day+1) In Hong Kong, both the stocks and the payment have to be paid On T+2.
Day (Turnaround) Trading
Day trading is allowed in the Hong Kong market but not on the Mainland. Shanghai/Shenzhen stocks that purchased via the stock trading link are not for sale until one day after the transaction. (T+1)
Trading Mainland stocks, unlike Hong Kong stocks, are subject to price limiting. The price limit for Shanghai/Shenzhen stocks is typically +10% of the last closing price (+5% or -5% for any shares in the risk alert board.) Northbound trade orders for Shanghai/Shenzhen stocks must lie within the price limit, or they face rejection by the SSE (Shanghai Stock Exchange and the SZSE (Shenzhen Stock Exchange) The SEHK or the Stock Exchange of Hong Kong also puts in place a price check for northbound A-shares buy orders. Those buy requests that have input prices that are lower than the best bid at that time for a particular percentage; usually, 3% are rejected.
Foreign Shareholding Controls
In the Hong Kong Stock market, there is no limit for stocks. For the Mainland stocks, however, shareholding by any investor from Hong Kong or overseas, should not be more than 10% of the issued shares. The accumulated dividends by Hong Kong and overseas investors should not be more than 30% of all the issued shares.
In Stock Connect, companies and individuals alike who invest in A-shares must pay a standard tax of 10% on cash dividends. This tax is withheld, and then paid to the tax authorities by the listed companies. Profit gained from share sales or business tax (money from A-shares sales) is tax exempted.
Obligation to Disclose Shares
In Hong Kong, when shareholding is 5% and above, the shareholder is obligated to disclose the same to the Stock Exchange of Hong Kong in 3 working days, although trading continues. If it is the first time for the shares to reach 5%, the shareholder needs to disclose within ten working days.
For the Mainland, once the shareholding hits 5%, the shareholder must disclose the same to China Securities Regulatory Commission (CSRC) and the Mainland exchange in 3 working days. Unlike in Hong Kong, trading is forbidden within 3 days.
On the Mainland, it is acceptable to trade on specified A-shares on margin, using a Hong-Kong broker, as long as you meet the relevant SSE/SZSE requirements. These requirements are different from Hong Kong, and one would have to look them up on the Hong Kong Exchanges and Clearing Ltd (HKEX) website.
Hong Kong and the Mainland have boundaries when it comes to trading. To thrive in both markets, one must be keen on the different rules of each market. Some subtle differences can make all the difference between making and losing money, especially considering Hong Kong and Mainland China each have their financial systems. Before trading, find out the differences, or better still, look for a reputable broker who will guide you through the process.