Factbox - The Shanghai-Hong Kong stock connect scheme

HONG KONG (Reuters) - WHAT IS THE AIM OF THE SCHEME?

The Shanghai-Hong Kong stock connect scheme gives China a controlled mechanism to open up its equity capital markets, allowing foreigners to access China’s mainland ‘A’ shares through the Hong Kong exchange (HKEx), and for mainlanders to access Hong Kong shares through the Shanghai exchange, subject to quotas.

HOW DOES IT WORK?

Trading of Shanghai shares via Hong Kong will be open to all Hong Kong and overseas investors - institutions and individual - while trading of Hong Kong shares via Shanghai will be open to all mainland institutions and individuals with at least 500,000 yuan (51,011.18 pounds) in a trading account.

Investors in Hong Kong and abroad will trade through a Hong Kong broker which will send the order to HKEx, which then passes it to Shanghai. The process is mirrored when mainland participants trade Hong Kong shares. Shanghai shares remain in Shanghai and are held in trust by a broker or custodian on behalf of the foreign investors. Hong Kong shares remain in Hong Kong, and are held in trust by a broker or custodian on behalf of mainland Chinese investors.

Purchases of mainland stocks are capped at 13 billion yuan a day and 300 billion yuan in total on a “first-come, first-served” basis. The Hong Kong stock limits are 10.5 billion yuan daily and 250 billion yuan overall. Market participants expect the quota to be lifted gradually.

WHAT DOES IT MEAN FOR CHINA'S OFFSHORE YUAN POOL?

The offshore pool of yuan deposits in Hong Kong may see some depletion initially as investors snap up A-shares on the mainland. But recent measures by the central bank including relaxation of yuan conversion limits and establishing intraday repo facility is expected to ease any shortage concerns.

WHAT ARE THE IMPLICATIONS FOR CHINA'S CAPITAL MARKETS?

In the short term, the scheme is expected to generate a surge in Hong Kong trading volumes and a smaller impact in Shanghai. Analysts say it has the potential to create the world's third-largest stock market if the two boards are fully integrated.

Hong Kong's average daily turnover is about 30 billion yuan, and Shanghai's about 71 billion yuan, Goldman Sachs estimates. In the long term, some analysts believe this scheme can be rolled out to other asset classes and exchanges like Shenzhen.

WHAT IS THE NEXT BIG THING TO WATCH FOR CHINA EQUITIES?

If successful, the scheme could expedite the inclusion of Chinese stocks on global benchmarks including the MSCI Emerging markets index, which could prompt global funds to plough more than $300 billion into China shares, analysts estimate.

WHAT ARE SOME OF THE OUTSTANDING ISSUES?

Shanghai requires shares to be delivered to a broker a day before sale, which foreign institutions fear could signal their intentions to the market. The Hong Kong exchange is working on a fix that it expects to be ready by the middle of next year.

(Compiled by Michelle Price and Saikat Chatterjee; Editing by Will Waterman)