Shanghai-HK stock link to speed up capital market reforms: Barclays

The Shanghai-Hong Kong Stock Connect scheme that allows mutual stock market access for investors will help to speed up China's capital market reforms, Barclays chief China economist Chang Jian said in a research report.

"The program will increase RMB liquidity in Hong Kong and offer offshore RMB holders a new investment channel, which in our view will support the internationalization of the RMB," Chang wrote.

China first announced the connect program in April. A joint circular released by the Shanghai and Hong Kong bourses said there would be a six-month preparation period before official launch of the scheme.

Analysts predict that mutual trading access will be officially launched in mid-October, following technological preparation and tests of both exchanges.

At present, institutional investors outside the Chinese mainland can only invest on the Shanghai and Shenzhen bourses by becoming Qualified Foreign Institutional Investors (QFII).

Barclays said the connect scheme will be a complement to the existing channels, and these programs will co-exist and be expanded before China fully liberalizes its cross-border investment flows.

Further liberalization will be followed by a significant increase in outward capital flows, which is most likely to occur in stages, and a slower rise in inward portfolio flows, according to the report.

"In the near term, the scheme could increase the volatility of the onshore and offshore RMB exchange rate. In the long term, we think the yuan has probably been overvalued since the global financial crisis, but the government has the capacity and willingness to keep the currency within a desired range," the report said.