The significance of “Shanghai-Hong Kong stock exchanges connectivity mechanism”
On April 11, China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission issued a joint statement to push out the pilot program called the “Shanghai-Hong Kong stock exchanges connectivity mechanism” in 6 months. Such trial will enable investors of Shanghai and Hong Kong to trade eligible shares listed on the other's market through local securities firms or brokers. It is a big progress for the opening up of China’s financial market to the world. For Shanghai, it is also another measure of financial openness since the establishment of Shanghai Free Trade Zone.
Though the emergence of cross-market trading between Shanghai and Hong Kong is surprising, it’s not accidental, in the past there were similar policy attempts.
►With the upsurge of China’s foreign exchange reserve, Hong Kong government once advised to open the “through train” for investors in mainland China to directly buy shares listed in Hong Kong. However, the worries for capital flight and China’s financial stability at that time caused the failure of such an attempt;
►Soon afterwards, Shanghai Stock Exchange intended to establish the international board to introduce international companies so that domestic investors may buy the stocks of the best companies in the world. But because in the initial stage of the international board, the companies that had been introduced were mainly the returning of the red-chip shares of Hong Kong H shares, it had hit the Hong Kong’s capital market to a certain degree. Without the support of Hong Kong, up to now there has been no substantial progress for the international board.
It’s impossible for domestic investors to go out and for high quality listed companies to enter. The performance of A shares may be viewed as gloomy since 2008, and the lowest records had been created many times. Not only the total market value of the listed company shares had been exceeded by that of the bonds in the interbank market, the volume of business and the number of stock investors also gradually shrank. What was corresponding to it was the continuous downturn of the valuation of the blue-chip shares, and even the strong support from the president of China Securities Regulatory Commission made no difference. But GEM (growth enterprise market) stocks were greatly welcomed and overvalued, even with the PE as high as more than one hundred times.
The bigger problem derived from that the information disclosure of listed companies of domestic securities market and the regulations of mainland stock exchanges were far behind those of the advanced capital market of Hong Kong and the U.S. Even, there are great difficulties for domestic investors to question the financial data of listed companies which seriously restricted the development of A shares.
In my opinion, the most effective power for China’s reforms often derives from opening up. This time the “Shanghai-Hong Kong stock exchanges connectivity mechanism” has taken lessons of “through train” and “the international board” to avoid one-way opening up and resource fights. Beginning from cooperative sharing, it’s helpful for two-way investment. It not only contributes to breaking the long-term depressed situation in the stock market of mainland, but also is beneficial for Hong Kong’s capital market to take a bigger role in Asia. In a word, such a scheme can realize the mutual interests for both Shanghai and Hong Kong, so it is easier to be achieved.
For China’s capital market, Shanghai-Hong Kong stock exchanges connectivity mechanism not only can adjust the stock value and make them in the two places tend to be consistent, more importantly, as the opening up of the capital market, it will reversely spur the reforms of the domestic capital market. Also, the mechanism will require authorities to work together to build a framework that would “respond to all misconduct in either or both markets”, and it will greatly improve the spillover effect of advanced regulation.
The far-reaching significance of Shanghai-Hong Kong stock exchanges connectivity mechanism also lies in whether it has promote China’s further opening up. The main engine of reforms in China for last decades is the very pressure for China joining the WTO, but such momentum for reform is going to slow. Therefore, China’s Premier Li Keqiang puts forward the idea of the establishment of Shanghai Free Trade Zone, hoping to take this opportunity to promote a new round of opening up to spur domestic reforms so as to maintain China’s long-term sustainable development. But since the establishment of Shanghai Free Trade Zone, though various kinds of news were reported, there are rarely key products and creative measures as the breakthrough for opening up.
Under the Shanghai-Hong Kong stock exchanges connectivity mechanism, the specific pilot product may gradually expand the opening up. After such mechanism becomes mature, it can be copied to the bond market, the real estate market and the primary stock market. In another word, it is not necessary that the opening up must reach the goal in one step. When encountering difficulties, we should struggle to solve the problems and continue reforms for opening up, and this is the attitude that we should have for Shanghai Free Trade Zone and the product design for Shanghai-Hong Kong stock exchanges connectivity mechanism.
Published on FT Chinese | 2014-4-16
