The launch of the Shanghai-Hong Kong stock connect scheme will be a disaster for South Korea’s stock market, according to a local professor specializing in Chinese finance and business.

“In the short term, there will be massive capital outflows from local investors who have not been able to make a profit here on account of the low interest rates and weak stock market,” said Jeon Byeong-seo, a professor at Kyung Hee University, in an interview with The Korea Herald.

The Shanghai-Hong Kong stock connect scheme ― touted as a milestone in the liberalization of China’s capital markets ― will allow foreign individuals to buy stocks in Shanghai, while mainland investors will be permitted to directly trade in Hong Kong-listed firms.

“Over the medium to long term, this will also lead to foreign capital outflows from South Korea’s stock market as the trading scheme will increase the possibility of China’s stock market joining the Morgan Stanley Capital International indexes ― a U.S.-based provider of global stock market indexes,” Jeon said. 

Currently, South Korea has the largest portion in the MSCI emerging markets index with 15.9 percent. However, if China joins the index, it will take up over 10 percent and Korea’s portion will inevitably be reduced.

When China joins the MSCI emerging markets index, there will be a foreign capital outflow of 6 trillion won ($5.4 billion) from South Korea’s stock market, according to a report released by Seoul-based Daishin Securities.

“What is crucial is how fast South Korea can get into the MSCI developed markets index to attract new foreign capital,” the professor said.

South Korea was not included in the index this year due to obstacles in foreign exchange liberalization and its foreign investor registration system.

The Shanghai-Hong Kong stock connect scheme was expected to be executed in October, but the plans were deferred reportedly due to the prolonged pro-democracy protests in Hong Kong.

With no formal launch date yet, Jeon predicted that Beijing may delay the scheme indefinitely if Hong Kong continues its protests. Under the program, mainland investors will also be able to trade in Hong Kong-listed companies directly.

Last month, the head of Hong Kong Exchanges and Clearing Limited said the regulations and technologies related to the stock connect had been cleared.

By Shin Ji-hye (shinjh@heraldcorp.com)