Bank of America-Merrill Lynch has tipped the Shanghai-Hong Kong Stock Connect to launch by the end of the year after Hong Kong’s exchange confirmed rumours that it would be delayed. This came amid speculation that the city’s pro-democracy protests have influenced the decision (which government officials have denied).
A late-evening announcement on Sunday said the bourse “has not received the relevant approval for the launch of Stock Connect, and there is no firm date for its implementation”.
The planned trading link-up, which will allow investors to tap into Shanghai-listed stocks via Hong Kong and vice versa, had been slated to go live this month. Speculation had grown that it would be postponed for a number of possible reasons.
David Cui, China strategist at BoA-Merrill, said: “It seems the groundwork is prepared, so it’s kind of a pushing-a-button issue. I can’t think of any significant reason for [a significant] delay.” He was referring to several statements by Hong Kong’s Securities and Futures Commission (SFC) and the exchange that technical preparations are in place.
While there are still issues to be ironed out, such as a lack of clarity over capital gains tax, Cui noted, that is unlikely to be the reason for the delay for the scheme, also dubbed the ‘through train’. He pointed out that lack of clarity on tax rules has not stopped the qualified foreign institutional investor (QFII) programme from expanding multiple times in the past two years.
An SFC spokesman confirmed the regulator had finalised all the necessary approvals required for the launch of Stock Connect, but he did not have any further comments to make. Meanwhile, the Shanghai Stock Exchange declined to comment on the delay.
Meanwhile, if the launch were to be delayed past the end of the year, that would likely affect the decision by index provider MSCI on whether to include China A-shares in its emerging-markets index series.
Elephant in the room
Given the various statements coming from both Hong Kong’s bourse and the SFC that the delay is not due to technical reasons, many industry players argue that it could be linked to the recent ‘Occupy Central’ protests in the city.
Christopher Cheung, a legislator representing the financial services sector, said: “The central government is concerned that the social instability today in Hong Kong has created investor uncertainty, meaning that it probably wouldn’t be a good time to launch the programme.”
Attitudes among some Chinese senior officials are already starting to turn negative, added Cheung, with some arguing against the favourable economic policies that mainland is bestowing on the SAR.
Some brokers are already telling clients that a possible timing for China regulators to grant approval would be after the retreat of Occupy Central. One cited the students’ exam period, typically in early December, as probably the earliest the launch would take place.
William Fong, a fund manager at Baring Asset Management, told AsianInvestor: “The statement claims that it [Stock Connect] is technically ready. If the delay is because of Occupy Central or any other political reasons, that would be a reason for disappointment, since it would raise more uncertainties.”
Both financial secretary John Tsang and Chan Ka-Keung, Hong Kong’s secretary for financial services, and the Treasury bureau have denied that the delay is related to Occupy Central. Chan did, however, say that the protests had caused anxiety in the financial markets.
Bruno Lee, chairman of the Hong Kong Investment Funds Association, noted that regulators needed to take into account the potential impact of the protests on the financial markets and therefore the potential need for investor protection.