Floor traders work under a world map displaying indexes of major markets during trading at the Hong Kong Stock exchange. Reuters

Talks in place on mutual trading but agreement is still to be struck

The Hong Kong Stock exchange denied speculation on Wednesday that a mutual market trading mechanism with the Shanghai Stock Exchange has been established.

"HKEx has been in discussions with its mainland counterparts regarding the potential establishment of mutual market connectivity initiatives between the mainland and Hong Kong. HKEx wishes to emphasize that as of the date of this announcement, no agreement has been entered into and there is no assurance that an agreement on mutual market connectivity will be entered into. The company will make a further announcement to update investors and the market," the bourse said in an announcement published on the exchange.

Hong Kong Exchange and Clearing Ltd soared by as much as 5.8 percent on Wednesday, the most since January 2013, to HK$126.40 ($16.29), before trading was suspended at 3:12 pm. Trading was to resume at 9 am on Thursday.

Earlier Wednesday, media had reported that the Hong Kong and Shanghai exchanges were launching easier channels for cross-border equity investments.

According to the 21st Century Business Herald, the Hong Kong Stock exchange and its Shanghai peer had reached a consensus to cooperate on cross-border stock trading.

Under the new arrangement, the Shanghai bourse would gather trading orders from mainland investors under the qualified domestic individual investor program, QDII2, which will let individuals invest in overseas capital markets.

The Shanghai stock exchange would then hand orders over to its Hong Kong counterpart for execution.

Meanwhile, overseas institutions would be able to invest in the A-share market through the Hong Kong exchange and the orders would be carried out by the Shanghai bourse. The report didn't indicate any quotas for foreign investment in the mainland equity market.

According to the report, the project is on the yearly schedule of Shanghai Stock Exchange and relevant technical work is ongoing.

Currently, overseas investors are able to invest in Shanghai and Shenzhen listed stocks only through QFDII and RQFII - programs that grant quotas for A-share investments, denominated in US dollars and renminbi, respectively, to institutional investors outside the Chinese mainland.

According to the latest data from the China Securities Regulatory Commission, by the end of February 48 funds and asset management firms had taken part in RQFII, while 258 institutions, including HSBC, acquired QFII quotas.

The State Administration of Foreign Exchange announced on Monday that as of March 28, the QFII quota had reached $53.58 billion, $1.26 billion more than in February. Total RQFII quotas reached 200.5 billion yuan, increasing 20.1 billion yuan month-on - month.

The People's Bank of China, the nation's central bank, said in January of last year that it had begun preparations for the qualified domestic individual investor program, QDII2, which will let individuals invest in overseas capital markets.

"It will be a major breakthrough for cross-border investment if the plan is realized. It will be much more convenient for investors on both sides," said Kenny Tang, general manager for the Securities Business Division of AMTD Financial Planning Ltd in Hong Kong.

He said that a better model would be to set the investment quota for the bourses instead of each institution.

"It's more flexible for investors and would attract more participants, including individuals. It will be just like investing in local markets," Tang said.

"A-shares are still attractive to outside investors because the valuation is very low at this moment," he added. "More institutional investors can help increase the share of long-term capital and stabilize the market. Meanwhile, more mainland investors can also boost the sentiment of the stock market in Hong Kong."