January 29, 2015 / 6:30 AM / 5 years ago

Hong Kong-Shenzhen launch set for second half, will miss June MSCI review - sources

HONG KONG, Jan 28 (Reuters) - The Hong Kong stock exchange expects a much-hyped trading link with its counterpart in Shenzhen to launch in the second half of this year, sources told Reuters - a timeline that could undermine China’s chances of being included in a major investor benchmark.

Many market watchers had expected the landmark Stock Connect scheme linking Hong Kong with Shanghai to be extended to Shenzhen before June, but individuals briefed by Hong Kong Exchanges & Clearing CEO Charles Li said a start towards the end of the third quarter now looks more likely.

Seen as China’s equivalent of the Nasdaq, the Stock Connect link to Shenzhen would for the first time allow foreign investors to trade the next generation of Chinese companies, including software, high-tech, and biotechnology stocks, via the Hong Kong exchange.

A spokesman for the HKEx said the exchanges are conducting a feasibility study on a link and “will seek approval from the relevant authorities upon completion of their proposal”. The Shenzhen Stock Exchange did not return requests for comment.

Market-watchers had speculated that China would look to launch the Shenzhen link ahead of the MSCI’s annual June review, during which the global index provider will decide whether to include China “A” shares in its Emerging Markets Index, the main global benchmark for emerging markets stocks.

Inclusion in the index would require funds globally to rejig their portfolios, potentially channeling billions of dollars into Chinese shares.

A Shenzhen Connect could also pressure other Asian markets, such as Singapore, Taiwan and Korea, as investment flows get diverted to the mainland should MSCI give China the green light.

Singapore’s stock market is already thinking of ways to counter the Stock Connect threat.

Speaking to Reuters on Wednesday, the Singapore Exchange’s CEO Magnus Bocker said he hoped to emulate the Stock Connect link-up within Southeast Asia, in a move that would promote cross-border trading and improve SGX’s liquidity.

The launch of Stock Connect in November last year is regarded as a milestone in the opening up of China’s stock markets, helping to ease some of the investment constraints that led the MSCI to keep China out of the index during its annual review last year.

It is not clear, however, if access to Shanghai alone, which is home to around 986 companies compared with more than 1600 in Shenzhen, will be enough to mitigate MSCI’s concerns around liquidity. A June launch of Shenzhen would have opened up the market further and underlined Beijing’s commitment to liberalise its equity market.

A third-quarter Shenzhen launch does not preclude inclusion in the index provided Beijing makes a formal commitment ahead of June, industry insiders said. Changes to the index are likely to come into effect in 2016, meaning Shenzhen could be online in time for funds to rebalance.

A slightly delayed launch would also allow the exchanges and Hong Kong brokers more time to do the technical work.

“There are quite a few differences between the Shanghai and Shenzhen stock exchanges, so although it will be based on SH-HK Connect it’s not a clear cut case of replicating the work done for Shanghai,” said Stephen Baron, manager at Shanghai-based investment consultancy Z-Ben Advisors. (Reporting by Michelle Price; additional reporting Shanghai Newsroom; Editing by Shri Navaratnam)

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