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HK, mainland stock markets restrained ahead of A-share move, UK referendum

Caution weighed on the Hong Kong and Chinese mainland stock markets on Tuesday, with investors restrained over the impact of an upcoming move to bring A shares into the MSCI global benchmark index, and mounting anxiety over Britain's possible exit, or Brexit, from the European Union in next week's referendum.

Regional markets were also tuned to the outcome of key policy meetings of the US, British and Japanese central banks this week that could shed further light on the future direction of interest rates.

Hong Kong's benchmark Hang Seng Index eased down 0.61 percent to finish at 20,387.53, extending its losing streak since last Wednesday's slump.

The Shanghai Composite Index picked up 0.32 percent to close at 2,842.19, snapping losses before last week's Dragon Boat Festival break, while the Shenzhen Composite Index rose a slight 0.29 percent to 1,832.63.

US index publisher MSCI is due to announce on Wednesday the result of its third round of talks on whether to include mainland shares in its global benchmark indexes as part of an annual review.

Hu Yifan, Hong Kong-based chief China economist at UBS Wealth Management, said the possibility of A shares being included is still evenly distributed, as it was last year.

The effect of the stringent restrictions on voluntary trading suspensions, implemented by the Shanghai and Shenzhen bourses late last month also remains to be seen.

This, coupled with alleged anti-competitive behavior by mainland stock exchanges that ban non-Chinese exchanges from launching financial products linked to A shares, may continue to keep mainland shares out of MSCI indexes, Hu warned.

Hong Kong Exchanges and Clearing Chief Executive Charles Li Xiaojia said on Tuesday the long-awaited Shenzhen-Hong Kong Stock Connect would be launched "very soon", and the Hong Kong Stock Exchange is "well and ready". But, he added, the second cross-border stocks link and the MSCI move are not necessarily correlated.

Gao Ting, chief China strategist at UBS, said that, basically, the market could expect a bout of volatility ahead of the MSCI decision, with mainland stocks finding support if A shares are eventually brought in. But, in his view, the rally would not be too strong.

According to UBS, an inclusion of 5 percent of A shares in MSCI will only represent just 4 percent of its entire indexes, and 1 percent of its influential Emerging Markets Index. This would translate into $2.2 billion investment in the A-share markets, compared with the mainland's more than 30 trillion yuan ($4.55 trillion) stock trading value and 600 billion yuan daily turnover.

Gao said that only when A shares are 100-percent included in the MSCI, then 46 percent of the entire indexes and 40 percent of its influential Emerging Markets Index will be represented.

Britain's referendum next Thursday on whether the country should quit the European Union, with the latest opinion polls leaning on a "yes" vote, has also been very much in investors' minds. An exit decision would send jitters across global financial markets and affect the US Federal Reserve's decision on raising interest rates.

Analysts believe Britain's departure would exacerbate risk-averse sentiment in global markets, triggering further capital flow into traditional safe-haven assets like the US dollar, the Japanese yen and gold.

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A view of the Shanghai Stock Exchange. Experts say the market could expect a bout of volatility ahead of MSCI's Wednesday decision of whether or not to include A shares in its global benchmark indexes, with mainland stocks finding support if A shares are eventually brought in, but the rally might not be too strong. provided to China Daily

(HK Edition 06/15/2016 page1)