Shenzhen-Hong Kong stock tie-up could drive global fund surge

The anticipated launch of the Shenzhen-Hong Kong Stock Connect will spur the inclusion of A shares in the widely tracked MSCI index series and trigger billions of dollars of global fund flows into mainland equity markets, experts told the Redefining Hong Kong seminar yesterday.

"The hopefully forthcoming commencement of the Shenzhen-Hong Kong Stock Connect is a necessity for MSCI's inclusion of China. Shenzhen is going to be a critical component in the decision of MSCI's inclusion of China," Simon Sims, an executive director in charge of Asian equity swaps at Morgan Stanley, told delegates.

"If China gets included in the MSCI, it will bring more investment into China's market. You will have huge liquidity of passive money flowing into the mainland market," Sims said.

Investment funds that benchmark performance against indices like MSCI must typically buy stocks included in them.

MSCI's inclusion of A shares could see long-lasting capital inflows to the mainland, with an estimated US$17 billion of net buying per year based on an additional market capitalisation of US$110 billion, said a recent Goldman Sachs report. The probability of China's A shares being included in the MSCI index by next year was "close to 100 per cent", Goldman forecasted.

MSCI is expected to reveal in June whether A shares will be included in its global index series. A key requirement is that global funds can buy both Shenzhen and Shanghai stocks, because A shares are listed on both exchanges, Sims explained.

Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia said on Wednesday that the exchange operators in both cities were ready to launch. Approval from Beijing was all that remained to be secured.