Stock Connect trading shrinks as China stock falls after MSCI inclusion

Introduction of China A-Shares on MSCI Emerging Market Index fails to stimulate trading through the Shanghai and Shenzhen Connect.

Trading through the Shanghai and Shenzhen Connect programme declined on the go-live of China-A shares inclusion to the MSCI Index, following muted trading in mainland stocks.

Northbound trading through the Stock Connect programmes, via Hong Kong, shrank to 2.28 billion yuan ($355.6 million) on Friday from 6.63 billion yuan the day prior, according to Bloomberg data.

On Thursday, the Hong Kong Exchanges and Clearing (HKEX) recorded buy and sell turnover of RMB34.69 billion ($5.41 billion), up 57% on Wednesday’s sessions, in anticipation of the inclusion.

Around 70% of the nearly 230 mainland-traded stocks joined MSCI’s emerging markets and global indexes on Friday.

However, direct trading on the Shanghai Stock Exchange dried up as major passive funds tracking the benchmark had finished building up positions on its stocks.

Furthermore, fears over trade tensions between the US and the EU, Mexico and Canada weighed on investors.

In preparation for the China A-share inclusion to the MSCI index, HKEX recorded a significant increase in the number of special segregated accounts (SPSA) opened by institutional investors, up by 60% from March.

The SPSA service enables institutional investors to participate in Northbound trading of Stock Connect by minimising counterparty risk in A-share settlement and maintains safe keeping requirements for institutional funds.

The test now for the Stock Connect infrastructure in Hong Kong is whether it can cope with trading volumes if there is sufficient offshore RMB liquidity to settle all of the transactions.

“The coming days will see the market paying very close attention to investor trading activity, funding requirements and most importantly, settlement statuses to ensure that this momentous event is successful,” said Gary O’Brien, head of custody product, APAC, BNP Paribas Securities Services.