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China's missing exchange link leaves traders in limbo

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Bloomberg, 27/10/14


China’s Missing Exchange Link Leaves Traders in Limbo
By Kana Nishizawa and Darren Boey 
Andy Maynard, global head of trading and execution at CLSA Ltd., had expected to be making his first trades through the Hong Kong-Shanghai exchange link by now. 
Instead, after six months of preparation for a start date that regulators indicated would be this month, CLSA, like more than 90 other Hong Kong brokerages that plan to participate in the program, is still in the dark about when it will begin. Stocks in Hong Kong and Shanghai fell today after Charles Li, the chief executive officer of Hong Kong Exchanges & Clearing Ltd. (388), said yesterday he has no idea when authorities will give the green light to proceed. 
Further delays risk curbing participation in a program that will give foreigners unprecedented access to China’s $4 trillion stock market, according to Maynard, whose firm helps clients invest in more than 60 countries. Investors who had piled into Shanghai shares anticipating price discounts versus Hong Kong would narrow as the link began are now retreating from those bets at the fastest pace since March. 
“It’s a shame that a lot of brokers and clients have done a lot of heavy lifting, done a lot of due diligence and rushed for a date,” Maynard said by phone from Hong Kong. “China isn’t as hot as it was months ago, and I feel the impetus of timing is now not that great.” 
No Timetable 
HKEx is at the “completion stage” of preparation for the link, Li said in a conference call with reporters yesterday, declining to speculate on a timeframe for the start date. 
“While the market will always appreciate advance notice, which we will strive to give, I’m not at this point stipulating any particular days,” Li said. 
The Hang Seng Index (HSI) slid 0.8 percent at the midday-trading break in Hong Kong. HKEx tumbled 3.8 percent, heading for its biggest loss in six months. The Shanghai Composite Index declined 0.6 percent, poised for its lowest close in almost two months. 
Authorities said in April they may make further announcements on timing, yet they haven’t given any more details beyond their original statement that the link would start in about six months. Hong Kong’s Securities & Futures Commission declined to comment and the China Securities Regulatory Commission didn’t respond to a faxed request for comment. 
Chinese regulators need to address whether foreign investors will pay capital gains taxes on mainland shares before the link can begin, Mark Mobius, who oversees about $40 billion as the executive chairman at Templeton Emerging Markets Group, said in an interview in Hong Kong. 
“Unless they get all these issues straightened out and clarified, nobody is going to invest,” Mobius said. 
Protest Impact 
Some traders are speculating pro-democracy protests in Hong Kong’s central business district could be part of the reason for the delay, said Jeffrey Chan, chairman of the Hong Kong Securities Association. 
“People will start to ask more questions past October,” Chan said. “So long as they give a clearer indication, the market shouldn’t have a problem, but if another week passes without any notice, participants will become more worried.” 
Brokerages are estimated to have spent at least HK$2 million ($257,822) each upgrading their systems and hiring staff in preparation for the link, according to Ronald Wan, the chief China adviser at Asian Capital Holdings Ltd. in Hong Kong. Delays will also mean lost commissions from the net 23.5 billion yuan ($3.8 billion) of daily cross-border stock purchases allowed under the program. 
For Howard Wang, who oversees about $20 billion as the Hong Kong-based head of Greater China for JPMorgan Asset Management, the timing of the link’s start is less important than making sure it works. He says the program is a “material step” in China’s financial liberalization. 
Stock Turnover 
A trade group that includes BlackRock Inc. and Goldman Sachs Group Inc. among its members sent a letter to Hong Kong’s securities regulator on Oct. 17, requesting a month’s notice before the start of the link, Reuters reported. 
The letter by the Asia Securities Industry & Financial Markets Association cited concern over technical issues and taxation, Reuters said. Asifma declined to comment on the contents of the letter. Cynthia Ng, a spokeswoman for BlackRock, declined to comment. 
While optimism toward the link sent the Shanghai Composite Index (SHCOMP) to the largest gain among the world’s 30 biggest markets last quarter, the gauge has since declined 3.2 percent. It sank 1.7 percent last week, the most in four months. 
Economic Slowdown
In addition to concerns about the link, Chinese shares are getting buffeted by signs of an economic slowdown. The world’s second-biggest economy expanded 7.3 percent in the third quarter from a year earlier, the weakest pace in more than five years, while retail sales grew less than analysts estimated in September. 
The Hang Seng China AH Premium Index, which measures the weighted average gap between the largest dual-listed shares, dropped 2.7 percent last week, the most since March, signaling a bigger discount for mainland equities. Turnover on Hong Kong’s exchange fell to the lowest level since July. 
Further delays will hurt “investors who have been betting on the program, and brokers who have lost revenue opportunities,” said Hao Hong, a strategist at Bocom International Holdings Co. in Hong Kong. “Lets hope the issues will be ironed out soon.” 

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