(Corrects spelling to Hong Kong in paragraph 2)
* HK equities volumes in 2016 down 43 pct, market cap down 30 pct
* HK's Bank of East Asia recently shut its stock broking unit
* Brokers hoped MSCI decision on China shares would boost business
* MSCI decided for 3rd time in 3 years not to include China
* Nearly $8 bln moved into China access products ahead of decision
By Denny Thomas, Saikat Chatterjee and Michelle Chen
HONG KONG, June 16 (Reuters) - Hong Kong stock brokers' year has gone from bad to worse after index provider MSCI decided not to add mainland Chinese shares to a benchmark indexed tracked by $1.5 trillion in global assets, dashing the hopes of a sector struggling with tumbling business.
Average trading volumes on the Hong Kong stock exchange in the first five months of 2016 are down 43 percent on a year ago, and the stock market is down 30 percent, its worst performance since the global financial crisis.
Without any external shocks to account for the weakness, analysts fear a longer-term structural decline for the city's finance sector, which acts as a conduit for investment into the mainland, including 'A' shares listed in Shanghai and Shenzhen.
The hoped-for inclusion of those shares in MSCI's Emerging Markets Index, which could draw up to $400 billion into Chinese markets, had been a glimmer of light for brokers in Hong Kong.
Indeed nearly $8 billion had flown into various China access products in recent weeks ahead of the decision, according to UBS calculations, mostly through Hong Kong.
"The MSCI decision is yet another blow to what has been a very challenging environment for banks and financial institutions in the sales and trading business," said John Mullally, director of financial services at Robert Walters in Hong Kong.
"Recruitment picks up when banks feel confident about their operating environment, and current market conditions are the worst I have seen in a while," he said.
On some days, trading across the entire Hong Kong stock market floor is lower than trading volumes for Chinese e-commerce company Alibaba Group on the New York Stock Exchange, Thomson Reuters data show.
Hong Kong's prosperity is intrinsically linked to the mainland, its dominant trading partner, where growth has slowed to a 25-year low.
Its own GDP shrank for the first time in nearly two years in the first quarter of 2016, as China's slowdown hit its neighbour's property market and retail industry.
Weakness in the finance sector, which accounts for 17 percent of GDP, claimed a first major victim earlier this month, when family-run Hong Kong lender Bank of East Asia Ltd closed its entire stock-broking unit, laying off 180 people.
Another local firm, AMTD, laid off almost 100 employees in their wealth management division, according to local media reports.
In addition to falling volumes, brokers who have been slow to embrace new technology are feeling the pressure of a shift towards automated trading, which cuts into fees and bypasses traditional trading staff.
About 44 percent of retail trading in Hong Kong is now online, up from just 13 percent a decade ago, according to Greenwich Associates.
There has also been a sharp fall in new listings on the local bourse. The city has seen only $5.4 billion of initial public offerings (IPOs) this year, compared with $13.3 billion at this time last year.
"People are going to revisit their whole cost base in the next six to nine months because the revenues are settling at a much lower level, and there aren't many IPOs either," said Rahul Chada, co-chief investment officer at Mirae Asset Global Investments.
"Bank of East Asia is just one example. You will see others trying to reduce structure, unless the volumes pick up."
Some foreign banks, including Barclays plc, BNP Paribas, Goldman Sachs, Morgan Stanley, have cut a combined 100 or so research analysts and equity trading jobs in recent weeks alone, according to four sources.
Others are looking beyond their home turf to keep their heads above water.
"I am trying to save my job by following different Asian markets than just focusing on Hong Kong," said one head of institutional equities at a European bank.
"While that means longer hours on the desk, it means I am slightly more valuable."
As Wall Street banks and Hong Kong brokers struggle, however, mainland Chinese brokers are grabbing market share, albeit from a low base.
State-backed firms such as CITIC Ltd and Haitong Securities have expanded into Hong Kong and taken prime offices, betting they can ride out the downturn with strong backing from their mainland parents.
A spokeswoman for CITIC Securities said the company has no plans to lay off staff. Quite the opposite - it said it was hiring in legal and compliance and fixed-income sectors.
(Additional reporting by Tris Pan; Editing by Will Waterman)