People watch an electronic board showing the Hang Seng Index. Hong Kong equities plunged almost 6% yesterday to a seven-month low as a rout in China spread into regional markets with traders also buffeted by fears for Greece’s future in the eurozone.

Reuters/Hong Kong


As contagion from China’s stock market rout spreads to Hong Kong, the local bourse’s long-touted strategy to help China liberalise its markets is looking increasingly like a double-edged sword.
Chinese stocks dived again yesterday, despite a series of interventions by Beijing to try to prop up the mainland markets, which have lost more than 30% in value since mid-June.
Initially resilient, Hong Kong’s Hang Seng index has also taken a beating, tumbling around 16% from its peak in April and wiping out all its gains for the year.
Hong Kong Exchanges & Clearing’s own share price has fallen around 34% since it peaked in late May.
HKEx, which holds a monopoly in stock trading in the city, enjoys a special status as China’s preferred partner to help open up its capital markets – a position long considered a unique advantage.
But the dramatic reversal in HKEx’s fortunes after a record-breaking rally earlier this year fuelled by the launch of a landmark “Stock Connect” trading link with Shanghai, suggests HKEx’s exposure to China’s reform agenda has its downside.
“The stock exchange has benefited immensely from the many connect schemes that have taken place over the last year. Now they find themselves at the centre of this sell-off primarily because of concern of a sharp drop in volumes and the likelihood of further China market reform schemes being put on ice,” said one investor in HKEx stock.
This week, Goldman Sachs and Mizuho Securities downgraded the stock, citing an expected slide in trading volumes. Turnover in Hong Kong, a key determinant of revenues, has declined from the peaks of nearly HK$300bn ($39bn) per day when Stock Connect trading exploded in April to nearer HK$200bn as of Tuesday.
“The volumes overshot, and expectations overshot, and now they are coming down to earth,” said James Antos, an analyst at Mizuho.
HKEx said the opening up of China’s capital markets still represented Hong Kong’s “biggest opportunity”.
“Our vision is to become the leading international exchange for China and a leading exchange for international investors. We are leveraging our China connectivity to become a truly global marketplace,” it said in a statement.
HKEx management has talked up a series of other China-related projects, including a Shenzhen Connect, bond connect, commodities connect, and related futures products.
These projects now look very uncertain as the mainland rout puts the brakes on Beijing’s reform agenda, with many market insiders speculating the planned autumn launch of Shenzhen Connect may be delayed until next year.
Jonathan Ha, chief executive of Red Pulse, a Shanghai-based markets research firm, said bringing Shenzhen online could potentially lift mainland stocks, but added: “It would also bring the potential of a very public disappointment if there is little to no demand. That, on balance, does not seem worth the risk.”