Illustration: Lu Ting/GT

The China Securities Regulatory Commission (CSRC) and the Securities and Futures Commission (SFC) issued a joint announcement Thursday stating that mainland and Hong Kong investors would be allowed to trade designated shares listed on both the Shanghai and Hong Kong stock exchanges under a pilot program which will begin within the next six months.

The announcement came on the heels of a speech made earlier that day by Chinese Premier Li Keqiang at the Boao forum in Hainan Province. "We will actively create conditions to establish a mutual connectivity mechanism between the Shanghai and Hong Kong bourses, so as to further promote the two-way opening and healthy development of the capital markets on both the mainland and Hong Kong," said Li.

This announcement from the CSRC and the SFC comes as somewhat of a surprise, as the Hong Kong Exchanges and Clearing Limited just confirmed on April 2 that it was in discussions with its mainland counterparts regarding the potential establishment of mutual market connectivity initiatives, although at that time it said no agreement had yet been entered into.

According to the announcement, mainland investors will have a total quota of 250 billion yuan ($40.16 billion) and a daily quota of 10.5 billion yuan to trade shares on both the Hang Seng Composite LargeCap Index and the Hang Seng Composite MidCap Index as well as companies with dual listings in the Shanghai Stock Exchange (SSE) and the Stock Exchange of Hong Kong Limited; while investors in Hong Kong will have a total quota of 300 billion yuan and a daily quota of 13 billion yuan to trade shares on the SSE 180 Index, the SSE 380 Index and dual-listed stocks.

As the joint announcement remarked, the connectivity mechanism can be seen as an important step in the opening of the mainland capital market. It is expected to consolidate the positions of Shanghai and Hong Kong as financial centers and enhance the attractiveness of both markets to international investors. Also, the move will likely promote the internationalization of the yuan by enabling mainland investors to directly participate in the Hong Kong market with the yuan.

Both mainland and overseas investors will now be granted unprecedented access to stocks which had previously been off-limits to them. Under the pilot, mainland investors will be able to trade shares of Macao casinos and tech giants such as Tencent Holdings, while overseas investors will be given access to Chinese traditional herbal medicine shares like Yunan Baiyao Group Co.

The trial scheme is also expected to narrow price gaps between A shares and H shares. In fact, thanks to news about the program, mainland shares skyrocketed Thursday, with several large-cap stocks like Shanghai-listed Anhui Conch Cement Co surging by the 10 percent daily limit. This, however, was followed by a heavy slump among H shares Friday, when Anhui Conch's Hong Kong-listed shares fell sharply by 7.23 percent on the day. In the future, many foresee market valuations improving in both markets as a result of freer two-way capital flows.

Finally, since all eligible stocks are blue chips, the pilot program can also be viewed as part of efforts by the SSE to push forward its broader blue-chip market strategy, which is expected to facilitate reforms to the mainland capital market in terms of stock valuations, regulatory supervision and investor education.

Early this year, when the SSE first laid out its key work targets for 2014, exchange officials emphasized their intention to support blue chips. Few took this point seriously at first though - after all, it seemed highly unlikely that regulators could shake up the mainland's established investment culture, which has long revolved around policy and small-cap speculation. Yet, mainland securities regulators later affirmed their determination with a series of measures aimed at making blue chips more attractive, including the upcoming issuance of preferred shares, which could be used by blue-chip companies to raise funds to repurchase their common stocks.

The introduction of market connectivity between Hong Kong and Shanghai could be a further example of the regulatory favor being shown toward blue chips, as the new program will not only channel overseas capital into eligible A shares but also cultivate a more mature investment culture on the mainland market.

Yet, given the different stock trading rules at the two bourses, it remains to be seen whether the program will be as warmly received among investors as regulators hope.

As the trading of A shares is subject to a 10 percent daily limit and the next-day (T+1) settlement mechanism, Hong Kong investors may consider these rules inconvenient. Meanwhile, mainland investors could be worried about trading risks associated with H shares, which can be bought and sold on the same day and are not subject to any daily limits.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn