Southbound Connect allows mainland investors to buy and sell stocks listed on the Hong Kong Stock Exchange through the Shanghai Stock Exchange or Shenzhen Stock Exchange. This mechanism was launched in 2014, opening up investment channels in the capital markets of the two places and promoting capital circulation and market linkage. Through Southbound Trading, mainland investors can more conveniently participate in investments in the Hong Kong market, introducing new investor groups to the Hong Kong market, and improving market liquidity and activity. It can be said that Southbound Trading supports the depth of the financial markets of the two places. Integration, Southbound Trading has become one of the most important sources of funds for Hong Kong stocks.

Stocks listed on the Stock Exchange need to be included in the subject of Southbound Trading before they can be traded through Southbound Trading.According to the relevant provisions of the "Implementation Measures for the Shenzhen-Hong Kong Stock Connect Business of the Shenzhen Stock Exchange (Revised in 2023)", if the stocks of companies listed on the Stock Exchange fall into the following ranges, they will be transferred to Southbound Trading stocks:   (1) Hang Seng Composite Large Cap Index constituent stocks;   (2) Hang Seng Composite MidCap Index constituent stocks;   (3) A constituent stock of the Hang Seng Composite Small Cap Index, and the average end-of-month market value of Hong Kong stocks in the 12 months before the stock adjustment inspection date is not less than HK$5 billion, and the market value is calculated based on the actual listing time for less than 12 months;   (4) H shares of A+H-share listed companies listed on the Stock Exchange.

Stocks within the scope specified in Items 1 to 4 of the preceding paragraph will not be included in Southbound Stock Connect stocks if any of the following circumstances exist:   (1) The corresponding H shares of A+H-share listed companies whose A-shares listed on the Shenzhen Stock Exchange or Shanghai Stock Exchange are risk warning stocks or delisting stocks;   (2) Stocks quoted and traded on the Stock Exchange in currencies other than Hong Kong dollars;   (3) Other circumstances determined by the Shenzhen Stock Exchange.

In September, Hong Kong Stock Connect is about to undergo another adjustmentAccording to the inclusion standards of Southbound Trading, 28 stocks are expected to be included in Southbound Trading in the upcoming September adjustment.These include Laopu Gold (06181.HK), which has just been listed, Yisou Technology (02550.HK), Auto Street (02443.HK), Quzhi Group (0917.HK), McFlys (02556.HK), Tea Momochi (02555.HK) etc.

This is undoubtedly a major benefit for companies that can be included in the Hong Kong Stock Connect.According to LiveReport big data, the stock prices of the 22 newly included stocks in Southbound Trading in March 2024 increased by an average of 3.61% from March 4 to March 28, and the average trading volume increased by 269%.

After being included in the Southbound Trading Connect, the investor base can be expanded, and the steady flow of southbound funds will undoubtedly greatly improve liquidity, thereby supporting the stock price. In the past, the liquidity of many stocks has basically increased significantly after being included in the Southbound Trading Connect.At the same time, being included in the Hong Kong Stock Connect is also recognition of the company itself. Stocks entering Southbound Trading need to meet many rigid requirements such as market capitalization, performance, and liquidity. Therefore, in the eyes of many people, Hong Kong stock companies that have entered Southbound Trading are equal to high-quality companies.

In the adjustment in September, it is also expected that 31 stocks will be removed from the Hong Kong Stock Connect. These include Agile Group (03383.HK), Beisen Holdings (09669.HK), Fangda Holdings (01521.HK), China Kepei (01890.HK), Sino-Ocean Group (03377.HK), Ningmeng Film and Television (09857. HK), Xiabuxiabu (00520.HK), Yidianyun (02416.HK), Yisi Health (02138.HK), Mace Health (02415.HK), etc.

Once these stocks are removed from Southbound Trading, mainland investors will only be able to sell these stocks in one direction and will no longer be able to buy them.For some stocks, such as Xijiao International Holdings, Xiabuxiabu and Youlian International Education Leasing, the shareholding ratio of Southbound Trading is quite high. Once they are excluded from Southbound Trading, it will undoubtedly be a huge negative.

According to LiveReport big data statistics, the stock prices of the 27 stocks that were excluded from the Southbound Trading Connect in March this year fell by an average of 24% from March 4 to March 28, and the average trading volume shrank by 52%. Among them, once many stocks were removed from the Hong Kong Stock Connect, their stock prices began to plummet. For example, Feitian Yundong, the “first stock in the Metaverse”, plunged 30.77% on the first day it was removed, hitting a record low. Many stocks such as Gome Retail fell more than 20% that day.