NewHong Kong stock connect with China’s Shenzhen share market a recipe for increased volatility due to circuit breaker

Hong Kong’s stock brokers believe the introduction of a circuit breaker in Chinese markets and the looming prospect of a stock connect link between the Shenzhen exchange and Hong Kong could cause more turbulence in the months ahead.

They said the Hong Kong stock market could be whipsawed by more wild swings because the Shenzhen shares are smaller and react more sharply compared to those in Shanghai, whose exchange forged a stock connect link with Hong Kong which began in late 2014.

In contrast to the initial belief that the stock connect would help bring in more funds from mainland China to Hong Kong, the introduction of circuit breakers in the mainland China led to the export of volatility to Hong Kong’s equity market.

“The circuit breaker rule in China is going to hurt not only the mainland market but also Hong Kong. When mainland investors could not sell shares in Shanghai and Shenzhen markets whenever they would be suspended due to the circuit breaker rule, they would sell their H-shares counterparts in Hong Kong,” said Christopher Cheung Wah-fung, a lawmaker for stock brokers here.

The circuit breaker rule started from Monday and requires trading in the Shanghai and Shenzhen stock markets to be suspended for 15 minutes once the CSI300 Index tracking large cap companies in both markets fall or rise by 5 per cent.

Once the market reopens, trading for the entire day will be suspenced if the CSI300 Index the rise or falls reaches 7 per cent.