A CATALYST FOR MSCI INDEX INCLUSION
Global index provider Morgan Stanley Capital International (MSCI) announced in June that it was delaying the inclusion of A-shares in the MSCI Emerging Markets Index for the third time following its 2016 market classification review. As a result, A-shares will remain on the review list for potential inclusion into the emerging markets index next year.
Sun believes the Shenzhen-Hong Kong link will be a "catalyst" for the long-awaited inclusion of A-shares into MSCI's Emerging Markets Index.
He forecast the longer MSCI waits, the more likely it is to have to substantially increase the inclusion factor for A-shares and "the time pressure is on the MSCI side, not on the Chinese mainland's side."
He believed the new link should relieve MSCI's concerns over market accessibility and capital mobility in the A-share market. It is worth noting that through the stock connect schemes, the A-share and Hong Kong markets together would form the second largest equity market in the world by market capitalization.
Before the two links, overseas investors can only have access to A-shares via Qualified Foreign Institutional Investor (QFII) and Renminbi QFII (RQFII) channels, which are restricted by license and quota approvals.
Sun said theoretically, investors can buy or sell 1 trillion U.S. dollars of A-shares over 260 trading days, which means the 20 percent monthly fund repatriation limit for QFII, a key reason for not including A share into MSCI index, is much less of a constraint in terms of capital mobility.
Jeremy Cook, Chief Economist at London-based World First, a foreign exchange company, said many global investors had little access to A-share market before, but the two new stock trading links provide new channels, and once A-shares are added to the MSCI index, overseas investors' demand for A shares will grow remarkably.
BETTER A-SHARE MARKET
In the past two decades the A-share market has been growing mature significantly.
The Shenzhen and Shanghai bourses are substantially more liquid, offer greater transparency and require higher quality standards for listing, disclosures and auditing of financial statements than many of their global competitors, according to the HSBC report.
With the launch of the new stock link, a full set of long-promised major financial reforms or changes on the mainland has been delivered.
They include interest rate liberalization, capital account opening, inclusion of Renminbi in the IMF's Special Drawing Rights basket, and the further opening of financial markets.
The Shenzhen-Hong Kong stock link is riding the tide of mainland's financial system modernization, it said.
Serving companies at different stages of growth, the mainland has built a multi-tiered capital market over the past quarter century.
On the Shenzhen bourse, around 480 competitive blue chips are listed on the mainboard, over 800 niche market leaders on the small and medium enterprises board, and over 550 innovative and entrepreneurial high-growth companies on the ChiNext Board.
The duo links are under Mutual Market Access, a mechanism for capital market cooperation between the mainland and Hong Kong.
The Mutual Market Access will further expand the range of securities eligible for trading under the mechanism to exchange-traded funds (ETFs) and to cover initial public offerings (IPOs), commodities and bonds into the mechanism is also under study, according to the Hong Kong bourse.
