China Stock Turmoil 2015

Stock connect scheme 'news' sparks Shenzhen and Hong Kong markets, but slowed as it emerged that no timeline set

Disappointment after Mainland central bank governor's article suggesting action this year is revealed to be old

PUBLISHED : Wednesday, 04 November, 2015, 10:32am
UPDATED : Thursday, 05 November, 2015, 4:56am

A report that the Shenzhen-Hong Kong stock connect scheme would be launched this year sparked market rallies in the two cities on Wednesday morning, but the mood turned to disappointment in the afternoon and the Hong Kong rally lost steam when it emerged that the positive “news” was almost six months old.

Just after markets opened on the mainland and in Hong Kong on Wednesday, an article written by People’s Bank of China governor Zhou Xiaochuan that was posted on the central bank’s website fuelled hopes the Shenzhen-Hong Kong stock connect scheme would be launched this year, despite widespread market expectations it would be delayed to 2016 following the stock rout that hit the mainland in June.

The markets surged on the unexpected, positive news. The ChiNext Index, covering mid- and small-cap technology firms, rose 4.43 per cent, or 107.53 points by 11.30am in Shenzhen and then crept up a further 6.38 points in the afternoon to close at 2,584.32. The Shenzhen Composite Index closed the morning session at 2,053.88, up 3.39 per cent, and ended the day up 5.12 per cent at 2,089.29.

The blunder made by PBOC this morning seems more like a genuine, human mistake
Senior finance industry source

In Hong Kong, the benchmark Hang Seng Index was pushed up more than 700 points, or 3 per cent, to 23,308 by 11.30am, but finished the day at 23,053.57, up 2.15 per cent.

However, during the markets’ lunch break, the PBOC inserted a line into Zhou’s article on its official website, explaining that his remarks had been made on May 27, during a “party education” lecture to staff.

Market Talk: Shenzhen-Hong Kong connection months away

He told them the Shenzhen-Hong Kong stock connect scheme would begin “within this year” and that it showed “China was opening up a new channel to connect the global capital markets”.

Just before the PBOC posted the clarification, the Hong Kong stock exchange issued a statement saying it had been in discussions with its mainland counterparts regarding the potential establishment of the stock connect scheme, but both regulators had yet to approve it.

The Hong Kong market gave up some of its gains in the afternoon session, and the shares of exchange operator Hong Kong Exchanges and Clearingf slipped from a pre-lunch high of HK$217.80 to close at HK$209.20.

A senior finance industry source very familiar with the progress of the scheme said the mainland stock market regulator, the China Securities Regulatory Commission, was still working on the scheme and was not prepared to issue a timetable for rolling it out.

“It is weird that the PBOC’s boss is giving signals for the stock connect scheme, while the CSRC is keeping its mouth shut,” the source said, adding that Zhou was more aggressive in pushing forward with mainland financial reform.

“But I would say the blunder made by PBOC this morning seems more like a genuine, human mistake.”

Erwin Sanft, chief China strategist at Macquarie, said the PBOC, and the Ministry of Finance, as more senior, powerful entities, were the major drivers of reforms on the mainland.

“They have been, since the beginning of the year, and continue to be, driving financial reform and deregulation,” he said.

Trading via the existing Shanghai-Hong Kong Stock Connect scheme has cooled after the major correction in the mainland stock markets.

Average daily turnover for northbound trading stood at 4.73 billion yuan in October, down from a peak of 11.36 billion yuan in June, while the average daily turnover for southbound trading stood at 1.42 billion yuan last month, compared with April’s peak of 9.79 billion.