Landmark Hong Kong-Shanghai stock link opens, markets dip

SHANGHAI (Reuters) - A trading link that will let Hong Kong and Shanghai investors buy and sell shares on each other's bourse debuted on Monday, in a major step towards opening China's tightly controlled capital markets.

Shares in both Shanghai and Hong Kong opened around 1 percent higher but quickly erased their gains, with key mainland and Hong Kong indexes turning negative on suspected profit taking by traders who had positioned for the launch, analysts said.

"The market had already responded to the stock link," Andy Wong, senior investment analyst at Harris Fraser (International) Ltd in Hong Kong said, referring to the Hong Kong market. "Short-term investors are taking profits from the market."

Much of the cash flow from the so-called Stock Connect scheme is expected to be northbound initially, with foreign investors on the Hong Kong Exchange snapping up mainland shares under a daily quota of 13 billion yuan($2.12 billion).

The expected fund inflow had helped push the SSE180 Index and the SSE380 Index - the two main Chinese destinations for foreign investment through the scheme - up more than 10 percent and 6.5 percent since late last month.

As of 0145 GMT, the CSI300 index of top Chinese shares and Shanghai Composite Index were down slightly after gaining more than 1 percent at open.

Southbound investment, capped by a daily quota of 10.5 billion yuan, is likely to be less active, with few mainland investors yet to sign up to the scheme.

The Hang Seng Index was down 0.2 percent.

Over the longer term, however, it could boost the average daily value of stock trading in Hong Kong by about 38 percent by 2015, French bank BNP Paribas estimates, and may ultimately lead to the creation of the world's third largest stock exchange.

China already operates several cross-border investment schemes but these are restricted to specific firms that must apply for a licence to participate.

The Stock Connect programme was originally expected to launch on Oct. 27, but that unofficial deadline passed, leading to speculation that the programme might be held up by technical or political hurdles.

The differing tax rules applying in Hong Kong and the mainland were also a major stumbling block, but China's Finance Ministry said on Friday that it would temporarily exempt taxes on profits made from the Connect scheme.

Hong Kong's leader CY Leung has hinted that the ongoing pro-democracy protests in the city had also played a role in the delay.

(1 US dollar = 6.1267 Chinese yuan)

(Reporting by Kazunori Takada; Editing by Will Waterman and Alex Richardson)