On Nov. 17, Hong Kong and Shanghai will celebrate a milestone. Thanks to a landmark program called Shanghai-Hong Kong Stock Connect, retail investors in the mainland and Hong Kong, for the first time, can directly invest in each other’s stock market.
Stock buyers are happy that they have more choices, but the program’s significance is far more than that.
The biggest significance of this investment program lies in promoting China’s push for yuan globalization and capital account opening.
China has been promoting the cross-border use of the yuan since 2008.
With years of effort, the currency has increased its popularity among overseas investors and governments which have massive yuan holdings, but China’s capital-account and foreign-exchange controls have made the use of the yuan not that convenient.
As overseas holders have very limited channels to invest their yuan holding in China, yuan globalization is basically a one-way street.
Under the stock connect program, Hong Kong investors are allowed to use yuan to invest in the mainland market.
Therefore, overseas investors can enjoy a convenient channel to invest their yuan in the mainland, facilitating the back flow of the currency.
In addition, as individual overseas investors are allowed to invest in the Shanghai market and as stock investment is subject to capital account management, the program naturally requires an opening-up of the capital account.
Such an opening can grow larger with the expansion of the program in the future.
The program is also conducive to enhancing investor education in the mainland.
The A-share market is rather isolated, running under its own rules. The stock connect program opens a chance for them to test the international waters.
It gives them a rare opportunity to acquire the knowledge of how a global stock market works and gradually learn the experience needed for investing internationally.
Indeed, mainland investors are not mature.
According to 1diaocha, a poll website, more than 80 percent of mainland investors say they tend to invest in stock markets by themselves instead of using a fund manager or any other institutional investor.
Nearly 70 percent say they decide what stocks to buy based on “tips” or advice from “friends”.
What is worse is that their awareness of risk is low. The mainland’s stock market has a history of 24 years and it has experienced much fewer ups and downs compared with major world markets.
Their risk awareness increased somewhat after the market turned bearish in 2008 amid a global financial crisis, but they are still far from developing a long-term, rational and risk-cautious mentality.
The stock connect program allows them to learn and improve by investing in the Hong Kong market.
The program also boosts Hong Kong’s status as a regional and international financial center.
With two markets connected, what is obvious is that Hong Kong’s position as the major offshore yuan center will be cemented.
The program shows that central authorities cherish and trust Hong Kong as a test ground for major financial reform in the mainland.
Earlier, there was speculation Hong Kong’s competitiveness has weakened in the larger Chinese economic landscape.
The theory was highlighted when the mainland ramped up the opening of its financial and investment market with the launch of the Shanghai Free Trade Zone.
But the stock connect program speaks volumes about the significance of Hong Kong.
Thanks to its high degree of internationalization and free economy, Hong Kong is a textbook case for the mainland in acquiring experience and a proxy to link mainland and global markets that cannot be replaced by other Chinese cities in the short to medium term.
Although Hong Kong is losing out in sheer economic size and in some traditional sectors such as exports and manufacturing, it still plays a vital role in China’s economic landscape.
Hong Kong’s advantages including internationalization, sound financial system and low taxes can become will more pronounced when the mainland begins to see costs increase rapidly.
With Guangdong province and Shanghai advancing their financial opening-up, Hong Kong can provide a rich talent and capital pool and play a vital role in regional integration.
[Chinese version 中文版]
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