China will link the Shanghai and Hong Kong stock exchanges over the next month as part of Premier Li Keqiang’s initiative announced in April to open up the Chinese market to foreign investors. The “Shanghai-Hong Kong Stock Connect” will for the first time allow foreign investors to directly trade shares on the Shanghai stock exchange and allow mainland Chinese investors to do the same in Hong Kong, reports the New York Times.

The move will create the world’s third-largest equity market in terms of combined market value of the listed companies, coming in just behind the New York Stock Exchange and the NASDAQ.

“This is the single most important development in China’s intention to internationalize this market,” an anonymous senior banker told the New York Times.

The Wall Street Journal reports that both stock exchanges have collaborated to publish new rules ahead of the upcoming launch. The new rules will allow for margin trading—the buying of stocks using money from brokerages—and there will also be new measures in place to fight daily trading limit manipulation.

The combined two-way daily trading volume will be capped at $3.8 billion, about 20 percent of the average daily trading volume in both Shanghai and Hong Kong, according to the Times. Also, individual mainland Chinese investors investing in Hong Kong must have more than $81,400 in their brokerage accounts—a measure that may exclude many potential investors.

All trades on the new exchange are to be settled in Chinese currency, a requirement that could lead to further internationalization of the renminbi.

Source: World Federation of Stock Exchanges

(Photo by Bernt Rostad via Flickr)

Posted by Ellen Huber