CONNECTING the giant stock markets of Hong Kong and Shenzhen is unlikely to fast-track the inclusion of Chinese mainland shares in a major global investment benchmark index as foreign access to the mainland’s markets is still restricted.

    Approval last week for the long-awaited extension of the Shanghai-Hong Kong stock trading link to Shenzhen’s market — and the scrapping of overall investment caps — advanced China’s cause to have yuan-denominated A shares included in MSCI Inc.’s Emerging Markets Index, but hurdles remain.

    China wants its stocks included in the MSCI index as this is tracked by US$1.5 trillion in global assets and could draw up to US$400 billion into China’s stocks over a decade. It has said that any global benchmark that doesn’t include China A shares is incomplete.

    Eighteen months after the Shanghai-Hong Kong stock connect was launched, many foreign fund managers still can’t invest through the link due to operational hurdles and legal issues with the way assets are safeguarded under its custody arrangements. Mainland shares have to be held onshore by the Hong Kong exchange on behalf of beneficial owners.

    Tuesday’s approval for the Shenzhen link reaffirms China’s commitment to reform, but is unlikely to be a deal-maker for MSCI, the U.S. index provider, investors and analysts said.

    “It’s getting China A shares one step closer, but there are other issues that MSCI needs to look at,” said Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Investment Partners. “The stock link market mechanism is not yet working perfectly, and there could be challenges launching products.”

    For a third year running, MSCI declined in June to add Shanghai and Shenzhen-listed A shares to its emerging markets benchmark, saying China had more to do to open up its market.

    MSCI said in June it would not include A shares in its benchmark index until China allows foreign investors to freely repatriate capital under its cross-border Qualified Foreign Institutional Investor investment program.

    It also wants China to scrap a rule requiring foreigners to seek Chinese regulatory nod before launching investment products that include yuan-denominated shares. (SD-Agencies)