41 HK Firms Call for Lower Stock Connect Threshold

On October 15th, 41 listed companies on the Hong Kong stock market issued a joint letter, once again calling for the expansion and threshold adjustment of the Stock Connect channel.

It is understood that the recipients of the letter include the China Securities Regulatory Commission, the Securities and Futures Commission of Hong Kong, the Shanghai Stock Exchange, the Shenzhen Stock Exchange, the Hong Kong Exchanges and Clearing Limited, and the Hang Seng Indexes Company Limited. The joint letter is signed by responsible persons of the 41 companies at the end.

It is learned that about half of the 41 companies are Hong Kong Stock Connect 18A companies (biotech companies that have not yet made a profit and are listed according to Chapter 18A of the Hong Kong Stock Exchange listing rules), so innovative drug companies on the Hong Kong stock market are the main force of this call.

The joint letter mainly calls for three points: to lower the entry threshold of the Stock Connect; to postpone the "exit from the Connect" adjustment, and to make retroactive adjustments to companies that have already "exited the Connect"; to support Hong Kong Stock Connect 18A companies to enter the Stock Connect.

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The specific suggestion to lower the entry threshold of the Stock Connect is to increase the cumulative market value coverage rate of the Hang Seng Index, raising the cumulative market value coverage rate from 94% to 96%, allowing more Hong Kong listed companies to meet the conditions for inclusion in the Hang Seng Index and entry into the Stock Connect.

The specific suggestion to postpone the "exit from the Connect" adjustment is to postpone the "exit from the Connect" adjustment for Hong Kong listed companies that have been on the Stock Connect list and have an "average market value at the end of twelve consecutive months below 4 billion", to maintain the smoothness of their Stock Connect channels.

In addition, it is also suggested that for Hong Kong listed companies that were removed from the Hang Seng Composite Index in the quarterly review results on February 16, 2024, and are拟 to be removed in the quarterly review results on August 16, 2024, reference should be made to the first and second calls for retroactive adjustments, and they should be automatically re-included in the Hang Seng Composite Index and the Stock Connect.

The specific suggestion to support Hong Kong Stock Connect 18A companies to enter the Stock Connect is that Hong Kong Stock Connect 18A companies should be automatically included in the Stock Connect, and Hong Kong Stock Connect 18A companies that have been removed from the Stock Connect should be automatically re-included in the Stock Connect trading targets.

It is understood that in May of this year, 19 Hong Kong Biotech companies had already written to the Hong Kong Stock Exchange, hoping that it would adjust the Stock Connect standards. In August of this year, the 19 Hong Kong companies once again sent a joint letter to institutions including the Hong Kong Stock Exchange, but these 19 Hong Kong companies are not all Biotech, and the recipients have also expanded to several institutions. The three calls in the letter are the same as the latest joint letter. In the latest joint letter, the number of signing companies has expanded to 41, about half of which are Hong Kong Stock Connect 18A companies.According to public market data, in the past September, the liquidity of the Hong Kong stock market gradually recovered, with the market recording the highest single-day transaction volume of HKD 505.838 billion on September 30th; among which, Shanghai-Hong Kong Stock Connect transactions accounted for 24.21% of the total transaction volume of the Hong Kong stock market on that day, and Shenzhen-Hong Kong Stock Connect transactions accounted for 17.05% of the transaction volume, with the total transaction volume of the two channels accounting for 41.26% of the total transaction volume of the Hong Kong stock market. This data demonstrates the important role of the Hong Kong Stock Connect in the liquidity of Hong Kong's capital market.

In the latest joint letter, 41 companies stated, "Fix the roof while the sun is shining." They hope that the issues exposed during the period of tight liquidity in the Hong Kong market will receive reasonable attention and adjustment against the backdrop of the gradual recovery of the capital market. Therefore, they reiterated the above three major appeals.

The joint views of the Hong Kong stock companies are that for listed companies on the Hong Kong stock market, liquidity is a key factor supporting the company's valuation and investor confidence. China's innovative drug industry is the most concerned by Chinese investors, and the Hong Kong Stock Connect serves as an important bridge connecting the Hong Kong stock market with A-shares. Inclusion in the Hong Kong Stock Connect means that the company can attract mainland capital, which can greatly improve liquidity.

Earlier, in the joint letter in May, 19 Hong Kong stock 18A companies stated that the current standards and mechanisms for the inclusion and exclusion of stocks in the Shanghai Stock Connect and Shenzhen Stock Connect are not conducive to the development of the innovative drug industry and the protection of Hong Kong Stock Connect investors.

The current mechanism is that Hong Kong Stock Connect stocks that are constituent stocks of the Hang Seng Composite SmallCap Index are assessed every six months for their average monthly market value over the previous 12 months. If it is below HKD 4 billion, it will be excluded from the Hong Kong Stock Connect. Affected by the overall macroeconomic impact, coupled with the回调 after the rapid expansion of the industry, the market value of innovative drugs of all Hong Kong stock 18A companies has been severely reduced, and a considerable number of companies have a market value below HKD 4 billion.

According to statistics, as of October 15th, there are 44 companies among the Hong Kong stock 18A companies with a market value below HKD 4 billion, most of which are innovative drug companies, such as北海康成（01228.HK）、三叶草生物（02197.HK）、君圣泰医药（02511.HK）、开拓药业（09939.HK）、德琪医药（06996.HK）、药明巨诺（02126.HK）、腾盛博药（02137.HK）、和铂医药（02142.HK）、歌礼制药（01672.HK）、加科思（01167.HK）、华领医药（02552.HK）、基石药业（02616.HK）、宜明昂科（01541.HK）、和誉（02256.HK）、康宁杰瑞制药（09966.HK）, etc.

The 19 Hong Kong stock 18A companies believe that maintaining the current standards of the Hong Kong Stock Connect will lead to two major consequences:

First, the slowdown of industrial development: Companies in the research and development stage need to maintain research and development investment through continuous financing. Losing the qualification of the Hong Kong Stock Connect or being unable to enter the Hong Kong Stock Connect will weaken the liquidity of the corresponding stocks, reduce the market value, and a series of chain reactions will cause new drug research and development companies to lose the opportunity to finance as a listed company, thereby weakening the competitiveness of the industry. Among the currently counted 60 listed Chinese biotechnology companies (including 18A, STAR Market, and NASDAQ-listed companies), 37% of the companies have reduced R&D expenditures, and half of the companies have a cash life cycle of less than 2.2 years. Financing is the most urgent issue for research and development-oriented enterprises. If the initiative is adopted, it will provide financial support for the development of domestic innovative drugs.

Second, mainland investors lose the opportunity to buy at a low price: Mainland investors have gradually accumulated experience in pricing innovative drugs over the past five or six years, and Hong Kong Stock Connect investors have stronger risk identification capabilities than ordinary investors. The current Hong Kong Stock Connect standards deprive mainland investors of the opportunity to buy at a low price. Investors who hold stocks of companies that have exited the Hong Kong Stock Connect can no longer buy stocks of related companies, which is not conducive to encouraging the expansion and development of the Hong Kong Stock Connect and a positive capital cycle. If the initiative is adopted, mainland investors will have more investment targets, the Hong Kong stock market will also receive more southbound funds to improve liquidity, and it will help to consolidate Hong Kong's position as a financial center.

Response from the recipientEconomic Observer Network has learned that after 19 Hong Kong-listed companies sent a joint letter to relevant authorities on August 26th this year, they received replies from the Securities and Futures Commission of Hong Kong (SFC), Hong Kong Stock Exchange (HKEX), Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE), and Hang Seng Indexes Company Limited between August 26th and September 10th.

In response to the joint letter at the end of August, the HKEX replied in an email on September 5th, stating that the Hong Kong Stock Exchange is committed to further expanding the scope of mutual market access and optimizing the relevant mechanisms. The current criteria for the inclusion of securities are implemented based on agreements between the regulatory authorities and exchanges of the two regions, hence any changes would require consensus. The mainland regulatory authorities and the HKEX will periodically review the operation of the mutual market access and actively explore how to optimize the relevant mechanisms, so as to make the mutual market access a more attractive and robust channel.

The HKEX stated that it would keep the suggestions in mind when reviewing and optimizing the mechanisms with partners from both regions. If there are any new developments, the market will be notified in due course.

The SSE replied in an email on September 5th, stating that according to the level of market development and investor protection, the securities regulatory authorities of both regions have issued a joint announcement that the scope of stocks included in the Stock Connect includes H-shares of A+H shares, Hang Seng Composite LargeCap, MidCap stock index constituents, and small-cap stock index constituents with an average monthly market capitalization of not less than HKD 5 billion over the past 12 months. The above standards apply to all stocks included in the Stock Connect, including the stocks of 18A listed companies in Hong Kong, and there is no differential treatment for them. At the same time, looking at the actual inclusion situation, since the end of 2020 when the two exchanges announced the inclusion of 18A unprofitable biotech stocks in the Stock Connect, the proportion of 18A unprofitable biotech companies included in the Stock Connect has far exceeded the proportion of other Hong Kong stocks included in the Stock Connect.

The SSE stated that in the future, it will continue to study and optimize the Shanghai-Hong Kong Stock Connect mechanism under the guidance of the securities regulatory authorities of both regions, with market development as the orientation, to better meet the needs of investors from both regions, support the development of the real economy, and consolidate and enhance Hong Kong's position as an international financial center.