(Yicai Global) July 18 -- As the one-year grace period for the rules curbing “fake foreign capital” flows into the Chinese mainland is about to end, Hong Kong regulators plan to test that blocking Chinese mainlanders’ Hong Kong accounts from selling A-shares through the stock connect program does not result in system and operational problems.

The Hong Kong Securities and Futures Commission will conduct the test on July 22, when trading is closed for the weekend, the Hong Kong Stock Exchange said in a statement yesterday.

Offshore investors can access Shanghai- and Shenzhen-listed stocks through the northbound trading link of the Chinese mainland-Hong Kong stock connect. But some mainland investors have opened accounts in the special administrative region to take advantage of more favorable conditions.

To crack down on “fake foreign capital,” the China Securities Regulatory Commission issued new draft rules in December 2021 to ban mainland investors from trading A-shares -- those stocks traded in the mainland -- effective July 25, 2022. 

Hong Kong brokerages then had to stop giving new trading permits to mainland residents, while mainlanders who already had trading accounts in Hong Kong would have a one-year transitional period after which they would no longer be able to buy A-shares through the stock connect.

Hong Kong’s brokers had about 1.7 million individual mainland clients, but only 39,000 of them were active in the past three years, the CSRC noted when it published the draft rules, adding that their transactions accounted for only around 1 percent of the total turnover, but could hinder the long-term development and stability of the stock connect program.

“Fake foreign capital” went to Hong Kong for higher leverage, according to industry insiders. The Chinese mainland has stricter regulations on over-the-counter capital allocation, and the maximum leverage for on-exchange and financing transactions is one-fold. But in Hong Kong, the leverage can be as high as five-fold, and the cost of funds is lower than in the mainland.

Moreover, these mainland investors may be involved in market manipulation, the insiders added.

Editor: Futura Costaglione