Who gains most from Hong Kong
By
Shutterstock/My Portfolio
HONG KONG (MarketWatch) - As the initial October starting date for the Shanghai-Hong Kong Stock Connect 'through train' came and went, local officials began anxiously lobbying Beijing. But Monday morning, Hong Kong's stock exchange announced, at last, the launch date of Monday, Nov. 17.
The long-awaited go-ahead for the scheme to allow direct trading of shares between Hong Kong and Shanghai came after a reported meeting between Hong Kong Chief Executive C.Y. Leung and Chinese President Xi Jinping.
Previously, comments from the head of Hong Kong's stock exchange, among other market participants, had linked the through train's delay with the city's pro-democracy demonstrations. But Beijing seemed unlikely to want to cut its nose to spite its face by shunting aside the stock-connect scheme.
So far, most attention has centered on proposals to make it easier for foreigners to trade a selection of 568 Shanghai-listed shares that make up 90% of that market's capitalization. The prospect of this new investment has already been credited for the Shanghai Composite Index's 14% advance for the year, as of Friday.
By some forecasts, access to domestic Chinese equities could add up to $2 trillion worth of stocks to global investors' menu. What's more, these stocks could also become a staple of global fund managers, as they get included in international index benchmarks. Back in September, this column looked at 5 reasons why the stock connect could be a catalyst for a revival in Shanghai's A-shares.
And if you consider the scheme as another important piece of the jigsaw towards making the yuan an international currency, then it's clear that delaying the scheme wasn't in Beijing's self-interest.
But perhaps an even bigger beneficiary of the Stock Connect's opening is Hong Kong. The market will ultimately determine whether Shanghai or Hong Kong gains the most from this new deregulation, but given mainland China's slow pace of financial liberalization, Hong Kong would seem to have the upper hand.
There would, after all, be no reason for the stock connect if Beijing were to have a 'big bang'-style opening of its capital account. But this was always highly unlikely, as Beijing's desire to stay in control meant a measured and incremental liberalization was inevitable.
This go-slow approach helps Hong Kong as a listing destination. Now it can offer access to the pot of money held by mainland China's investors, in addition to a number of other existing advantages when it is lined up next to the Shanghai market.
First of all, Hong Kong starts with a freely convertible currency, and it also benefits from a long-established rule of law and business transparency.
The fact that both stock exchanges will retain separate regulatory and trading regimes likewise looks to work in Hong Kong's favor. For example, mainland Chinese investors will be pleased to find the Hong Kong market does not have restrictions on intraday trading or a capital-gains tax.
Perhaps Chinese regulators will be able to direct the best companies to list in Shanghai, although this will only work for state-owned businesses rather than private ones.
And it is not just Chinese companies that may notice Hong Kong is now occupying a new sweet spot as a listings destination. International companies may also make the same calculation as they look to get access to China's new investor class and make their names known. Hong Kong has the opportunity to become a global hub for secondary listings.
In fact, if you consider the luxury-retail trade, the territory already plays this role. Due to its tax-free policies, Hong Kong has become the shop window for international luxury brands targeting China. If you do not have a boutique in Hong Kong, consider yourself anonymous to China's burgeoning new consumer class.
Hong Kong could attempt to replicate this model for other international listings, again arbitraging the regulatory and tax differences with mainland China.
All this might put Shanghai's nose out of joint, however, as it has talked before about having an international bourse made up of blue-chip names, although such proposals quite never got off the ground.
The unknown factor is whether competition with Hong Kong pushes mainland authorities to speed up domestic reform. For instance, Shanghai might push to get greater freedoms for its new Free Trade Zone.
Meanwhile, Hong Kong's leader Leung will find the Stock Connect is unlikely to be the answer to his political problems. In a community already divided by vast income inequality, more investment inflows may well just add to the divisions. While the financial community and asset owners may celebrate, many others will likely bemoan the prospect of higher property prices and inflation.
Post a Comment for "Who gains most from Hong Kong"