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Crossover: Tax exemption boosts enthusiasm of foreign capital market to A share

Reporter: Cathy Yang 丨 CCTV.com

11-18-2014 16:49 BJT

Just as cross-border trade kicked off after the launch of Shanghai Hongkong stock connect Monday, international investors have already raced to invest in mainland shares. The last minute elimination of the capital gains tax has given investors even more incentives to park their money in the A share market. 

And the race is on to make money from Monday’s launch of the“Shanghai-Hong Kong Stock Connect” program. For the first time, investors can now make cross-border trades.

Prior to the link-up, only select fund managers had been able to invest in Mainland markets through a quota system. Now, any investor who can buy stocks in Hong Kong can also buy shares in the Chinese companies.

A week before the launch, banks here started wrestling for a share of the spoils from cross-border trading, with lenders such as the Bank of China waiving fees—some even offering gold medals as prizes to entice customers.

Huge demand has driven up the price of shares trading on both exchanges, starting back in April when the scheme was announced.

The Stock Connect Scheme allows global investors to grow their money in a broad range of companies that had once been largely kept away from international access. The scheme provides even broader; and wider access to a scope of businesses found in Chinese companies listed here in Hong Kong and New York. And for the Mainland, the influx of money from these forgone institutional investors could bring some order to its market, driven largely by fast-trading small investors.

Mark Konyn is CEO of C-CAM, a joint venture between global investment manager Conning & Company, and Taiwan’s largest insurance company, Cathay. His clients have become keener to invest since China’s Finance Ministry announced that, for now, profits earned from "Stock Connect" trades will be tax exempt.

As Francis Cheung of CLSA explains, stocks traded on mainland exchanges are called “A-shares,” and only Chinese mainland citizens could buy them. “Stock Connect” aims to open up that market in a big way.

"The hope on this actually is to help the A-share market get exposed to the international investors and increase the sophistication of the market. Because in the A-share market there’s a lot of retail investors, they’re more momentum driven, so if there are more institutional clients, they’ll decrease volatility," Cheung says.

Beijing's last-minute decision to waive the 10 percent capital gains tax clears up the big gray area for foreign institutional investors—part of Beijing's efforts to promote more foreign investment in Mainland companies—and to help develop China's capital markets.

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