In the news: SH-HK Stock Connect launch date set, Mexico scraps China rail deal and ICBC named for renminbi-clearing in Canada

SH-HK Stock Connect starts next week

The Shanghai-Hong Kong Stock Connect will debut on November 17, giving foreign investors unprecedented access to China's US$4.2 trillion stock market. The programme allows a net Rmb23.5 billion (US$3.8 billion) of daily cross-border purchases and is one of the biggest steps the country has taken to open up the capital account, increase global use of the renminbi and turn Shanghai into an international financial centre.

Source:
Bloomberg
The Wall Street Journal

Despite the hype and flurry of investors to the exchanges, one question still remains – will China levy a capital gains tax on international investors who buy mainland shares through the link PRC laws suggest foreigners must pay a 10% levy but the government has apparently never collected the tax. Foreign investors have been confused by the capital gains tax for over a decade, and with the connect coming up, the need for clarity is becoming urgent. If Beijing levies a tax, the HKEx could extract money from the brokerages that place orders through it, which may affect regulatory capital requirements for banks. In addition, it may not only be an unfamiliar task for international brokers to collect this tax but also difficult to trace trading histories and accurately determine gains from stock sales.

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Mexico scraps US$3.75 billion China high-speed rail deal

Mexico has revoked a high-speed rail contract from a China-led consortium after opponents to the bid accused the government of favouring the investor group. The country's Communications and Transport Ministry has said it expects to re-run the tender later this month under the same terms, and keep it open for six months to enable all interested parties to get involved. China Railway Construction can take part and could be eligible for compensation. French Alstom and Canadian Bombardier said they would also consider participating.

Source:
Reuters

This is primarily political. Mexico's internal dispute over the contract was about transparency, where opponents attributed the bid outcome to favouritism. Germany's Siemens and Canada's Bombardier were also interested in the project, and last month Siemens' Mexico rail chief said the company, along with Bombardier and Alstom, asked for more time to prepare a bid but was denied by the Transport Ministry. China has been able to secure bids in less mature markets for some time now, but it needs a solid track record in order to tap the mature western markets. This deal could be a solid boost, but will China win the second round

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ICBC becomes first clearing bank for renminbi in North America

The PBOC has named ICBC as the clearing bank for Chinese currency transactions in the Canadian market, marking it the first renminbi-clearing bank in North America. This is in line with China's push for greater use of its currency in global trade and investment and eventually making the renminbi a major reserve currency. China and Canada have agreed to set up a currency swap line worth US$32 billion and China has also granted Canadian financial institutions a Rmb50 billion (US$8.2 billion) quota to invest in its domestic capital markets.

Source:
The Wall Street Journal

Although Hong Kong remains the main offshore market for the renminbi, other financial centers such as Singapore and London have been competing for renminbi-denominated business. The currency is growing rapidly in international use and influence, no doubt, but are the markets back at home stable enough to support this global growth A quote from a recent TIME article on Xi Jinping comes to mind: “China wants the status of being a superpower, but it doesn't want the responsibility.”

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