To date, foreign investors looking for direct exposure to China's volatile domestic capital markets have had to go through a detailed process of applying for:

Most of the quotas issued to more than 250 QFIIs were far below the maximum entitlement of around US$1 billion.

This could now be about to change. The Shanghai-Hong Kong Stock Connect Program (Stock Connect, for short) is a pilot program to allow two-way market access between the Hong Kong Stock Exchange (HKEx) (香港交易所) and the Shanghai Stock Exchange (SSE) (上海证券交易所). Stock Connect was announced in April 2014 and is expected to go live in November (see Jam tomorrow? Timetable for implementation). The pilot program, "indicates China's intent to relax RMB convertibility restrictions and to open up its financial market; a trend that is likely to continue in the future" says Jeanette Chan, Head of the China Practice Group at Paul Weiss in Hong Kong.

Stock Connect is made up of two separate trading tracts:

Northbound trading will allow investors from HK and overseas to trade A shares listed on the SSE 180 index, SSE 380 index and SSE and HKEx dual listed shares. Southbound trading will allow Mainland Chinese institutional investors and individual investors with at least RMB500,000 in their securities and cash accounts to trade shares listed on the Hang Seng Composite LargeCap Index, the Hang Seng Composite MidCap Index and SSE and HKEx dual listed shares.

Market participants will be able to trade on Stock Connect on all days when both the HKEx and SSE are open for trading. Northbound and Southbound trading will be subject to both an aggregate quota that caps the absolute amount of cross-boundary flow funds and a daily quota that limits the maximum daily net purchase value of cross-boundary trades. The limits are set out in the table below:

Northbound trades executed through Stock Connect will follow the trading rules of SSE and Southbound trades will follow the trading rules of HKEx.

Clearing and settlement will be handled by the Hong Kong Securities Clearing Company Limited and the China Securities Depository and Clearing Corporation, which will set up a direct link for the cross-boundary clearing, each of them becoming the other's direct participant in providing clearings services for Stock Connect.

Although Stock Connect holds the promise of vastly broader access to China's domestic capital markets, Jeanette Chan cautions that there are five significant barriers that foreign investors should be aware of:

Stock Connect is currently undergoing a trial run. The Securities and Futures Commission and CSRC jointly announced on 10 November 2014 that Stock Connect will commence on 17 November 2014 despite a statement from CY Leung, the Chief Executive of Hong Kong, on 11 October 2014 that Beijing would not give a definite timetable for granting its approval due to the "Occupy Central" political protests in Hong Kong.

With implementation in flux, investors should be watchful. Chan advises investors and business operators to "keep a close eye" on developments "and be prepared to implement changes to their trading systems," in response to any future clarifications from SSE and HKEx.

"Stock Connect enables investors to directly trade securities in the other stock exchange market," says Chan. "In the past only QFIIs and RMB QFIIs could invest directly in A-shares. Stock Connect will open this investment opportunity to a greater class of potential investors." This would improve the liquidity of A-shares. Greater participation by sophisticated international investors could also, "improve transparency and corporate governance for Chinese public traded companies as well as the efficiency of the SSE."

As Liu Ting, Managing Associate at King and Wood Mallesons notes, "listed companies whose shares are eligible under Stock Connect may need to think a bit differently to adjust to this new client base. To attract more investors from outside their home jurisdictions, they may need to make disclosures in the language of those new investors and improve communications with investors. Chinese companies may also recruit more international talent to senior management and board roles to demonstrate their international credentials to investors clearly."

The impact of Stock Connect will also put Chinese corporate governance under the international microscope.

Stock Connect will serve as a model for other asset classes in China. "The next stage could be a Shenzhen–Hong Kong stock exchange," says Alwyn Li, Partner at Deacons in Hong Kong. "The government could also work with other stock exchanges and some day there could be a Shanghai–London stock exchange for example."

Tom Fairley, Partner at Zhong Lun in London, agrees. "Stock Connect clearly represents the start of a new chapter in China's financial integration into global markets. We'd expect, in time, Stock Connect to increase the likelihood of Chinese companies listing in China becoming a staple target for overseas investors, across the institutional and retail sectors. FX and margin trading are also going to see big changes."

The role of General Manager (GM) is critical to the success of China operations.

Wielding substantial power, at best, the mighty GM is often a bridge between headquarters overseas and operations on the ground in China.

At worst, a rogue GM who escapes notice can cripple a company's China operations and result in a loss of company technology and financial losses.

Examples of rogue GM behaviour include:

Many international companies are localising their senior executive in China. Doing what is required to manage and control local management becomes more complicated when a senior manager is employed under a Chinese law governed employment contract.

Therefore, it is critical that foreign investors:

There are several best practices that have evolved over the years to achieve this, some of which are flagged in our current and forthcoming employment toolkit (see, Legal update, Practical Law China: October focus), and others in box, Preventative measures. The recent case of Wang Zhuo & Shanghai Jahwa United Co Ltd (the Shanghai Jahwa case) heard before the Shanghai Hongkou Labour and Personnel Dispute Arbitration Committee provides an illustration of the importance of them.

As touched on in China GC Agenda: September 2014, foreign investors that employ senior managers under a Chinese law governed employment contract need to know that they must ensure that they comply with Chinese employment law when seeking to terminate them. Often such managers are legally sophisticated and aware of their rights under Chinese law. Establishing grounds for termination and compiling evidence that will be accepted by a court or arbitration is challenging.

In the Shanghai Jahwa case, a GM successfully challenged the termination of his employment, despite having been removed by the board of directors. The employer was found not to have complied with mandatory termination requirements under Chinese employment law. The employer was ordered to reinstate the GM, and to pay his backdated salary up to the point of reinstatement. (For further details of the Shanghai Jahwa case, see box, Shanghai Jahwa case). This decision "shows the conflict between the Company Law and Labour Contract Law, which General Counsel needs to be prepared for," says Jonathan Isaacs, Partner at Baker & McKenzie, Hong Kong.

"Simply emailing a GM to tell him his employment is terminated may work in some jurisdictions, but it will not be sufficient in China," says Robin Gerofsky Kaptzan of Haworth & Lexon Law Firm, Shanghai. There are different benchmarks and legal processes to adhere to, and when it comes to evidence, documents are king. "Employee testimonials saying the General Manager did X, Y or Z will give a picture of what's happened, but will not be strong evidence in an actual dispute. You need hard documentary evidence," says Isaacs.

"Under Chinese laws and judicial practice, the removal of a GM by board resolution in accordance with the Company Law and articles of association of the company does not automatically constitute the termination of the employment relationship between the company and the GM," says Liu Ting. The key issue is the Labour Contract Law of the People's Republic of China 2013 (2013 Labour Contract Law), which only permits an employer to terminate an employee on very limited grounds. To terminate an employee employed under Chinese law, one of those grounds must be met and the employer must have the necessary documents to back the decision up. "The 2013 Labour Contract Law does not state the employment relationship will be terminated if the board of directors removes a manager in accordance with the provisions of the Company Law," explains Kevin Jones, Partner at Faegre Baker Daniels, Shanghai.

In the Shanghai Jahwa case, the company sought to rely on Article 39(2) of the 2013 Labour Contract Law, which states that an employer may terminate an employment contract if the employee ''materially violates the employer's rules and regulations''; and Article 39(3), which states that an employer may terminate an employment contract if the employee ''commits a serious dereliction of duty or practices graft, causing substantial damage to the employer''.

To prevail on the first ground in a challenge to the termination, the employer would have to show that they had a properly implemented company rule (usually in the form of an employee handbook) that:

"Most employee handbooks I have seen would not be specific enough to capture what the employer was alleging, which was that the general manager was solely responsible for the employer's internal controls, and that a material defect in such controls would be grounds for termination. Even if it did, there would be an argument as to what constitutes a material defect," says Jones.

To succeed on the second ground in a challenge to the termination, the employer would have to show both that:

It is very difficult for employers to prove to the satisfaction of an arbitrator or judge that they have met both requirements.

In this instance, "the evidence that the employer had done a recent performance review, and found the general manager was 'up to grade' was probably particularly damaging to the employers case" says Jones.

"The arbitrator took a strict view of the law and in this respect and I think he or she is correct."

If a company intends to terminate the employment with its GM, it needs to consider, "whether any statutory cause for unilateral termination can be constituted, and if solid evidence can be provided to justify the general manager is at fault. The company then needs to go through the employment termination procedures accordingly," says Liu Ting.

To minimize the risk of a difficult employment dispute, "The company should seek at first instance to mutually terminate the contract or persuade the general manager to resign."

Mutually agreed termination is generally the preferred way of handling a termination dispute. "Given the law as it currently stands, employers would be wise to mutually agree the termination with the general manager before having the board remove him or her," says Jones. "That will likely mean an employer will need to additionally compensate a general manager to get him or her to agree to the early termination, but that is really the only way to avoid this risk, particularly in the absence of strong grounds for termination by statutory cause".

The best resolution in China is through a signed settlement agreement, not via a long drawn out dispute," says Kaptzan. "Litigation is simply too unpredictable and expensive."

As Jeanette Yu, Counsel at CMS China, points out, "whilst the statutory laws and regulations applicable to the termination of the contract of a general manager are the same nationwide. In practice, the interpretation of such statutory laws and regulations by different employment arbitration commissions in different locations may be different and lead to different arbitration outcomes."

For more information on how to terminate senior employees in China, see our upcoming toolkit of resources covering Chinese employment law (see Legal update, Practical Law China: October focus).

As Kaptzan says, "It's important to avoid concentrations of power in one employee and make sure you have appropriate checks and balances in place to keep things running smoothly and compliantly to ensure that any inappropriate behaviour or practices are picked up early or even prevented."

Kaptzan gives the following practical tips to help keep GM behaviour in check: