Investors face disconnect as 'through train' stalls

Anticipated launch of trading program passes with no word on its fate

The most notable equity market event on Monday in the mainland and Hong Kong was a launch that did not happen - the long-awaited start of the Shanghai-Hong Kong Stock Connect, which had been widely expected to begin.

That was not totally a surprise, market observers conceded, but it was still a letdown. And there has not been any official word from either side on what comes next.

The program will allow overseas investors to trade in selected A shares and mainland investors to trade in a group of Hong Kong-listed H shares.

It is not the best time to launch a project that holds so much promise, even though all necessary preparations for Stock Connect are complete, according to the stock exchange of Hong Kong's Chief Executive Officer Charles Li.

But brokers, investment bankers and investors are waiting for a resolution to the Occupy Central movement, which is overhanging the Hong Kong economic landscape.

Li simply said: "I cannot say if Occupy Central is a reason, or how much it is affecting the decision."

However, his words were widely taken by stock analysts as a sign that the central government is holding back on the "go" signal because of concern by mainland investors about the disturbances in Hong Kong.

"The central government is watching and weighing the situation in Hong Kong, and it will decide a proper date to kick off the program," said Jin Dehuan, a professor at the Shanghai University of Finance and Economics.

Tax issues or cross-border supervision could be other hindrances, but such factors need not be fully resolved before the start of the program, he added. At the same time, cancellation is not an option, because it would be a major setback for the mainland's capital market and a blow to the internationalization of the renminbi.

But even the delay was poorly received by investors, who have already been waiting for some seven years. The benchmark Shanghai Composite Index retreated 0.51 percent to 2,290.44 points on Monday, while Hong Kong's Hang Seng Index lost 0.7 percent.

The Shanghai index has fallen 4.1 percent from this year's high on Oct 9 as investors became convinced that the "through train" would not depart on time. Since then, stocks that were seen to gain most from the program have taken a beating.

CITIC Securities Co Ltd and Haitong Securities Co Ltd, the two biggest brokerages on the Chinese mainland, each slumped more than 2.7 percent in Shanghai and Hong Kong.

Hong Kong Stock Exchange and Clearing Ltd, which runs the Hong Kong exchange, tumbled 4.7 percent to HK$166.20 ($21.36).

Some individual investors are concerned about the impact of the protests and are reluctant to give their money to brokerages for southbound trading.

Industry insiders said that leading mainland fund managers such as China AMC Asset Management Co Ltd and China Southern Asset Management Co Ltd have developed Hang Seng Index-based exchange-traded funds for the Stock Connect program, but they are waiting for approval from the China Securities Regulatory Commission to launch those funds.

Neither company was available for comment on Monday.

Brokerages are estimated to have spent at least HK$2 million each to upgrade their trading systems and hire staff in preparation for the link, according to Ronald Wan, chief China adviser at Asian Capital Holdings Ltd in Hong Kong.

Delays will also mean lost commissions from the net 23.5 billion yuan ($3.8 billion) of daily cross-border stock purchases allowed under the program.

"People will start to ask more questions after October. So long as they give a clearer indication, the market shouldn't have a problem, but if another week passes without any notice, participants will become more worried," said Jeffrey Chan, chairman of the Hong Kong Securities Association.

"Any reversal of market expectations may lead the market to a different direction, as the A-share market was growing based on a firm belief in the Stock Connect program," Hong Hao, chief strategist at BOCOM International Holdings Co Ltd, wrote in a note on Monday.

Analysts and investors hope Stock Connect will substantially improve market liquidity and lift sentiment.

But investors have become increasingly impatient since mid-October, when what was supposed to be a six-month preparation period ran out and authorities gave no indication for a possible start of the program. The benchmark Shanghai index sank 1.7 percent last week, the largest loss in four months.

"I do not think the rise of the A-share market since July has been supported by fundamentals. It was driven by other factors," said Wu Zhaoyin, an analyst with Shenzhen-based Essence Securities Co Ltd.

After all, statistics indicate that the macroeconomy is weak, the property sector is still struggling and tapering of quantitative easing in the United States is draining capital from global markets, Wu said. "We are concerned that the market will go through a correction in the fourth quarter."

The Hang Seng China AH Premium Index, which measures the weighted average gap between the largest dual-listed shares, dropped 2.7 percent last week, the most since March.

"Further delays will hurt investors who have been betting on the program, and brokers who have lost revenue opportunities," said Hong.