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Stock connect delay spooks Chinese markets

HK-Shanghai stock connect will materialize: JPMorgan

Greater China shares slumped Monday amid disappointment over the delay of the Shanghai-Hong Kong Stock Connect, but market participants remain hopeful the scheme will be launched by year-end.

Hong Kong Exchanges & Clearing (HKEx) said on Sunday that there remains no firm timetable for launching the so-called "through train ", which directly links the two stock exchanges and is an major step in China's efforts to open up its capital market.

HKEx said it has not received the relevant approval for the launch of Stock Connect and noted that further announcements would be made as and when there were material developments on the timeline of launch.

Read MoreShanghai-HK stock connect: What you should know

Hong Kong 's benchmark Hang Seng index traded down almost 1 percent, led by declines in Hong Kong Exchanges and Clearing, which plunged 3.8 percent. China's Shanghai Composite, meanwhile, fell 0.6 percent.

"Clearly, this is a disappointment for the market in the shorter-term, " Jing Ulrich, managing director and vice chairman of Asia Pacific at JPMorgan Chase told CNBC.

The delay in the launch of the Stock Connect, which was announced in April with a six-month deadline to begin operations, comes amid ongoing pro-democracy protests in Hong Kong raising speculation over whether the postponement is a result of political tensions.

An investor watches the electronic board at a stock exchange hall in Jiujiang, China.
ChinaFotoPress | Getty Images

However, most market participants do not think so.

"It's a fairly complex scheme…I would imagine they are working on technical issues in the last minute," said Ulrich.

The program will allow foreign investors to place buy or sell orders on Shanghai's A-share market through brokers in Hong Kong. Chinese investors meanwhile will be able to use mainland brokers to invest in Hong Kong's H-share market.

Read MoreA new way to get in on Chinese stocks

Stephen Sheung, head of investment Strategy, SHK Private shared a similar view, noting that there are lots of regulatory complexities in establishing a cross-border scheme pertaining to taxation and investor protection that need to be worked out.

Sheung says he's hopeful that these kinks will be ironed out in the coming months and the scheme will be launched by year-end, adding that clarity over its launch date may emerge during China's Central Economic Work Conference expected to take place between late-November and early December.

Sean Darby, chief global equity strategist at Jefferies agrees: "It's still possible we get the Connect coming through before the end of the year…I haven't given up hope."

Enthusiasm in tact

While disappointment over the delay in scheme weighed on stocks Monday, strategists expect this to be short-lived.

Read MoreWith China set to open stock trading, investors lay groundwork

"The reaction in stocks [Monday] is temporary. Much of the disappointment around the delay has been priced in," Sheung said.

Ulrich says enthusiasm around the program has not gone away.

"When the Stock Connect does get launched in the coming few months, we will see quite a lot of enthusiasm on the part of international investors to access the domestic market and also for mainland investors to broaden their investment avenue by allowing them to invest in Hong Kong for the very first time, " she said.

Read MoreWhy this market is escaping the global selloff

Foreign investors are currently only allowed to invest in mainland listed stocks via either the Qualified Foreign Institutional Investor (QFII) or the Renmimbi Qualified Foreign Institutional Investor (RQFII) schemes. These channels are only available to larger foreign institutional investors who meet the qualification criteria and does not provide allow direct access to retail clients.