Date
20 September 2017
Even with the launch of Shanghai-Hong Kong Stock Connect, a long-term arrangement is necessary to truly break the barriers between the Hong Kong and Shanghai stock markets. Photo: Bloomberg
Even with the launch of Shanghai-Hong Kong Stock Connect, a long-term arrangement is necessary to truly break the barriers between the Hong Kong and Shanghai stock markets. Photo: Bloomberg

Unified market will take Greater China region to next level

Under Shanghai-Hong Kong Stock Connect, the trading and clearing systems of the two stock exchanges are linked.

With simplified trading procedures and friendlier currency exchange regulations, investors in Shanghai and Hong Kong can directly buy or sell stocks in each other’s market, saving a lot of time and money.

In addition, the new mechanism stimulates daily trading and increases the efficiency of arbitrage by eliminating the price difference between A and H shares.

However, the two sides have different regulatory regimes which pose a lot of difficulties in buying and selling simultaneously through the two bourses, even for the same stock.

Moreover, the concessions offered by the pilot scheme are temporary.

A long-term arrangement is necessary to truly break the barriers between the Hong Kong and Shanghai stock markets, or else the financial power of the Greater China region — Hong Kong, Macau, Taiwan and the mainland — can never be truly harnessed.

Taiwan and mainland China were a single entity. They have been separated for the past 65 years for political and historical reasons.

After 35 years of economic reform, the size of the mainland economy has exceeded that of Japan and is quickly catching up to the United States.

Once again, the mainland has become the center of economic development in the Greater China region.

Economic integration across the Taiwan Strait is under way.

However, cross-strait integration is hindered by differences in political systems and legal frameworks, not to mention the fact that each side has its own currency and capital market.

Perhaps the integration of the European economy can provide some useful insight into how economic and financial co-operation can transcend geopolitical boundaries.

In the 1970s, the European Common Market agreed to set up a monetary union and float their currencies on the foreign exchange market.

Through their concerted efforts, productivity and economic strength of the western Europe were greatly enhanced, allowing it to compete with the US on equal footing.

In order to integrate the Greater China region, we must start with the stock market.

In fact, there is a lot in common between Shanghai-Hong Kong Stock Connect and the Greater China Enterprise Market Board that I proposed earlier.

The latter is a second-board market as opposed to the main board that provides a platform for public listing of big and mature companies.

Through the second board, securities can be traded simultaneously in Hong Kong, Taiwan and the mainland, linking the three stock markets in real time.

Simply put, the three financial markets should work closely together to build an interconnected financial network in order to facilitate their capacity for capital accumulation and enhance their economic structure.

Since Shanghai, Hong Kong and Taiwan are in the same time zone, the Greater China Enterprise Market Board could operate under a unified mechanism.

Shares can be traded at the same time and at the same price in their own currencies.

In fact, shares of the HSBC Holdings have been traded in this way in London, Hong Kong and New York for a long time.

It is also important that a regional register of shareholders is set up, so that shareholdings are transferable within the region.

The cutting-edge technology of internet communications has made it possible for trading transactions to be completed almost instantly across borders.

A Greater China board can solve the issue of “different rights for the same shares” as happened when Jardines Group was redomiciled to Bermuda the 1980’s amid apprehensions about the 1997 handover, and most recently when Alibaba was choosing a venue to list its shares.

The second board could learn from the New York Stock Exchange where authorities regulate only the trading and clearing of stocks.

Issues such as changes in shareholding, company restructuring and mergers are governed by the law of the jurisdictions where the listed companies are domiciled.

This article appeared in the Hong Kong Economic Journal on Feb 12.

Translation by Alan Lee

– Contact us at [email protected]

RA

Co-Director at Centre for Social and Political Development Studies of Hong Kong Institute of Asia Pacific Studies, the Chinese University of Hong Kong

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