Photo: Reuters/Jason Lee

The looming inclusion of 222 Chinese mainland-listed stocks in the MSCI Emerging Markets index is expected to create liquidity problems, raising concerns among investors.

The Hong Kong Monetary Authority is working with the investment industry to work out solutions to the potential problem, The Asset reports, including allowing users of the Stock Connect to tap onshore renminbi (CNY). Currently, offshore renminbi (CNH) is used to finance Stock Connect transactions.

Inclusion of the selected stocks is scheduled for May of this year, prompting expectations that trading volumes will be increasing as fund managers rebalance portfolios.

A bump in the trading volume over the “rebalancing weekend,” when the inclusion officially takes place, is of particular concern.

“Before the MSCI inclusion, the daily quota functioned as a check on the system because at any given day all the banks (in Hong Kong) need to do is find 13 billion renminbi in net liquidity and send it to China for settlement of the trades,” Cindy Chen, country head of Hong Kong Securities Services for Citi was quoted as saying.

“If the quota is removed and the market depends solely on CNH for financing Stock Connect trades, it remains to be seen how much CNH liquidity can be sourced on the same day basis at a reasonable price. Liquidity in the CNH market is actually decreasing because it is also used for settling trades on the Bond Connect,” Chen says.

Asia Times Financial is now live. Linking accurate news, insightful analysis and local knowledge with the ATF China Bond 50 Index, the world's first benchmark cross sector Chinese Bond Indices. Read ATF now.