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HK-mainland market link worth effort
By Hong Liang (China Daily)

The apparent dismissal of proposals to link the Hong Kong and mainland stock markets as infeasible by Hong Kong Exchanges and Clearing Chief Executive Paul Chow Man-yiu might seem most discouraging to the government officials and economists who have shown great enthusiasm and support for the idea.

His remarks were seen in Hong Kong as a refutation to a suggestion made earlier by Fang Xinghai, deputy director of the Shanghai government's financial services office. Fang recommended that a platform be created to trade shares in the 38 companies dually listed in Hong Kong and Shanghai.

But it is wrong to see Mr Chow's comments as entirely negative. He was quoted by Hong Kong media as saying that unless the yuan is fully convertible, stocks in the two places cannot be freely circulated. However, he added that expanding the existing QDII, or qualified domestic institutional investors, and QFII, qualified foreign institutional investors, mechanisms could be the foundation for such a link.

That was more or less what Hong Kong Monetary Authority chief Joseph Yam has been saying all along. In one of his recent essays, Mr Yam, a strong proponent of the link, wrote that a merger of the two stock markets isn't an option in the present regulatory environment.

Acknowledging the hurdle posed by the restrictions on currency convertibility, particularly in the capital account, Mr Yam contends that it is still feasible to establish a channel that "would have the effect of pooling the various financial markets of the two jurisdictions, providing much greater liquidity and much more efficient price discovery".

As an illustration of how such a channel could be built, Mr Yam cited the use of the QDII and QFII schemes. He also noted the possibility of creating derivative instruments for trading in both markets with an arbitrage mechanism to equalize prices.

It is obvious that efforts to establish any form of link between the two markets must be initiated by the respective government authorities because it would invariably involve a host of regulatory issues. It is not surprising for people in the private sector to remain skeptical because their money could eventually be put at risk.

Therefore, Mr Chow's comments should not be seen as a wet blanket, but rather a subtle reminder that private sector interests must be taken into full consideration in formulating any stock market link to serve investors and financial intermediaries. The private sector is in a better position than government officials in designing a workable channel that could create trading opportunities that would, in turn, help eradicate some of the existing market anomalies.

Indeed, success of the proposed market channel rests on the scale of trading opportunities at acceptable risk.

In the present regulatory environment, it can be envisioned that a market channel would most likely be highly controlled. But the amount of capital allowed to flow through such a channel would inevitably determine its effectiveness as a link.

Striking an acceptable balance between macro-economic considerations and market requirements can only be achieved through close cooperation between the authorities of the two jurisdictions and private sector operators in Hong Kong and on the mainland. To give the undertaking greater momentum, it may be advisable for the Hong Kong Monetary Authority to take the initiative by reaching out to the investment and stock broker community by creating a working committee to lay the groundwork for the market channel.

As Mr Yam has conceded, the task is complicated. But the potential benefits a market channel can bring to the nation are undeniably worth the efforts by all parties involved.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 02/27/2007 page10)