HKEX ready for bigger market role

Bourse looks to be catalyst connecting mainland, overseas stock exchanges

Hong Kong is set to play a bigger role in connecting the mainland and overseas capital markets when MSCI incorporates A shares in its emerging markets index on Friday.

"Trading turnover on the Hong Kong stock exchange could be higher on Thursday before the A-share inclusion by MSCI on Friday," said Hong Kong Exchanges and Clearing Ltd CEO Charles Li Xiaojia. "The Hong Kong stock exchange clearing system is ready to handle the anticipated increase in stock trading."

Starting on June 1, United States-based financial index compiler MSCI will include 226 large cap A shares, tradeable through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, in its emerging market index. A shares could see their weighting on the index rise to around 0.75 percent.

HKEX is liaising with the Shanghai and Shenzhen stock exchanges, as well as mainland financial regulatory bodies to launch A-share-related financial derivative products in Hong Kong as soon as possible, Li said.

With the A-share inclusion in MSCI's Emerging Market Index, more A-share-linked derivatives will emerge in the market, as financial institutions will seek appropriate hedging products, Li said on Thursday at the company's news conference in Hong Kong.

He warned that the stock markets' enhanced connectivity could also increase volatility.

Major financial institutions said the A-share inclusion will bolster A-share market internationalization in the years ahead.

"This development will further accelerate the opening of the capital markets in the Chinese mainland, promote A-share market internationalization and strengthen mutual market access initiatives between Hong Kong and the mainland," said Louisa Cheang, vice-chairman and CEO of Hang Seng Bank Ltd.

"We see foreign ownership of mainland stocks increasing to better reflect the scale of the country's economy and markets. These inflows can help finance the nation's real economy as it becomes increasingly driven by technology, services and consumption," HSBC's China CEO Helen Wong said.

"In the near term we will stay overweight on the mainland equity market. The Chinese mainland's fundamentals and corporate earnings are the key driver of the mainland capital market," said Zhu Haibin, chief China economist at JPMorgan Asset Management.

MSCI estimates the inclusion will spur an initial fund flow of about $20 billion into the onshore A-share equity market, but the short-term effect will be negligible given the daily market turnover hovers at about $50 billion to $100 billion.

Over the next five to 10 years, fund flows through A shares will reach more than $600 billion, which will have a more prominent effect on the A-share market, HSBC said.