There has been a lot of talk about the development of a link between the Shanghai and Hong Kong stock exchanges. The project which gives foreigners more access to Shanghai’s market is scheduled to premier next week on November 17th. The premiere of this link is a key step in the process of China becoming a country with internationally open markets. Investors from all over the world will now be able to make limited amounts of investments in the Shanghai exchange through Hong Kong.
The level of trading that will occur is still going to be highly regulated. Trades will only be completed by those with Hong Kong brokerage accounts and there will only be access to a limited number of Chinese companies (those listed on either the SSE 180 or 380 index). Brokers out of Honk Kong will be limited to investing no more than 1% of the exchange’s total market cap. Foreign investors will also be subject to increased taxes on their investments at an additional 10%. Even with these regulations, this development should have a major impact on China and the rest of the world.
China is taking many of the right steps to opening up their markets, but at to be expected not everything will come at once. This is a sign that China should continue to liberalize its markets and control of the Yuan. With the introduction of the Shanghai-Hong Kong link, there has been talk of a similar link between Honk Kong and Shenzen which has China’s smaller exchange. The creation of this original link should bring an inflow of money that could potentially help China’s slowing growth, but more importantly it signals a move towards a more open economy in China.
Sources:
Gismatullin, Eduard, and Kana Nishizawa. “Shanghai-Hong Kong Stock Exchange Link Will Start in a Week.” Bloomberg.com. Bloomberg, 10 Nov. 2014. Web. 11 Nov. 2014. <http://www.bloomberg.com/news/2014-11-10/shanghai-hong-kong-stock-exchange-link-will-start-in-one-week.html>.
I just read an article about this development. Supposedly U.S. investors are extremely excited about this stock link as they have been hoping to invest in firms that directly target the Chinese consumer. With the exception of Alibaba and a few other internet firms this has been very difficult to do.
This will also allow domestic Chinese investors to diversify there portfolios and therefore spread their investment risk. As investors foreign and domestic have more choices for investment, funds can be invested in startups and allocated to businesses that have results-driven success and profit margins. This will benefit investors, businesses, and entrepreneurs.
In line with Tommy Joe’s comment, my sense is that liberalization in general benefits the one doing the liberalizing, not outsiders. How many US investors interested in China haven’t already found a way to buy assets? (For example, is GM a China play??) In addition, US investors already hold diversified portfolios; adding China to the mix won’t matter much. That’s not true for domestic investors.
However, in terms of financial markets themselves, China has a savings surplus. Opening up the Shanghai market to investors in Hong Kong doesn’t matter to China. It may matter to Hong Kong. But again, the savings are already there (in US Treasuries and other assets) and shifting a bit of those savings from bonds to stocks is not a big deal.
Finally, what’s happened since the link started? Check for followup stories. And if there are none, then we have our answer: once in place, the link was too irrelevant to make the news.