HONG KONG, April 3 Hong Kong Exchanges and Clearing Ltd's (HKEx) push for greater cooperation with mainland China bourses is the centrepiece of CEO Charles Li's strategy to boost trading in a financial hub where fewer companies are listing their shares.
The initiative would allow investors to buy mainland-listed stocks via the Hong Kong exchange and vice versa - a move that analysts and investors see as vital for boosting HKEx's flagging trading volumes and securing its long-term viability.
HKEx stands to lose ground as China moves towards full convertibility of the yuan, which would allow foreign investors to trade on mainland exchanges in Shanghai and Shenzhen unfettered by quotas or other constraints.
Allowing mainland investors to buy Hong Kong shares directly - known as mutual market access - could help reverse that trend.
"This is about increasing volumes. Since Li joined HKEx his statements have been about a longer strategy to tie the exchange to China," said James Antos, an analyst with Mizuho Securities Asia in Hong Kong.
HKEx shares had jumped nearly 6 percent on Wednesday, their biggest gain in over a year, on a report on the cooperation talks in the 21st Century Business Herald. On Thursday, the stock ended at HK$126.80, its highest close in 10 weeks.
The exchange itself said such talks remain a work in progress, and there was no guarantee a deal would be reached.
HKEx faces a raft of other challenges, including rising costs from its 2012 acquisition of the London Metals Exchange (LME) and a U.S. class action lawsuit alleging anti-competitive behaviour by the LME.
HKEx's $6-$7 billion of daily turnover pales in comparison to New York, Tokyo and mainland China exchanges, all of which have daily turnover at least four times higher.
Hitching itself to mainland exchanges would allow HKEx to boost volumes and benefit more directly from the growth of China, the world's second-largest economy.
"Mutual market access is our main growth driver," HKEx's Li said at a media briefing in Hong Kong last month.
China had piloted schemes to allow mainland individual investors to buy Hong Kong shares as far back as 2007. But the so-called qualified domestic individual investor (QDII) program was not fully implemented, with China concerned about relaxing its grip on financial flows out of the country.
The same goes for investment flows from outside China into mainland stocks.
"While offshore investors can invest in China through various quotas, this has been so far largely restricted to a limited number of experienced institutional investors," said Francois Perrin, head of Greater China equities at BNP Paribas in Hong Kong, who manages $2.5 billion in assets.
About $53.6 billion of quotas have been granted under a dollar-denominated Qualified Foreign Institutional Investor (QFII) program at end-March, and 200.5 billion yuan ($32.3 billion) under a yuan-denominated Renminbi Qualified Foreign Institutional Investor program.
But, while China has increased the quotas granted to investors, the relatively small total available is more indicative of the difficulty some foreign investors face while applying for them.
Analysts also see practical difficulties in connecting Hong Kong and mainland exchanges, suggesting Li's strategic vision could be some years away in practice.
"The mechanical steps towards implementing this mutual market access would be pretty challenging to work out," said Mizuho's Antos. (Additional reporting by Vikram Subhedar; Editing by Ian Geoghegan)