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One Country, Two Stock Markets No Longer?

Investors cheer with the thought of having mutual access to the China exchanges (Hong Kong and Shanghai). But instead of a big bang, Breakingviews’ Peter Thal Larsen argues that such a change may cause a slowdown in funds. Reuters’ Tara Joseph gleans nuggets from him.

Slow and Stead Wins the Race

Tara Joseph says, “Fresh reports, Peter, that China and Hong Kong will give each other mutual access to their markets. Now if this is true, it is big news. But we’ve heard this song before.”

Peter Thal Larsen says, “We have, and I have to say, the reports sound a bit premature. And the Hong Kong Exchange has said that even though there are talks going on with Shanghai, there’s nothing really happened, yet. But our view really is that this is not so much a ‘big bang’ as more of a sort of ‘slow slam.’ Really, there’s been a lot of discussion for many years about the possibility of allowing Chinese investors to buy shares in Hong Kong, and also allowing investors in Hong Kong to buy shares on the mainland.

“If that were to happen, that would be a big deal, but there are many reasons why it hasn’t happened, yet. And the main reason is that if you allow Chinese investors to take their money out of Hong Kong by buying shares, you would essentially be opening up China’s capital account. And that is something that China has said it wants to do in the long term, but is not something that it’s about to do any time soon. So the feeling is that even if something were to happen on this front – and it does sound like there are some discussions going on and there will be some kind of an agreement – it’s going to be gradual rather than all happen in one go.”

Hong Kong Needs a Boost

Tara Joseph says, “Understandably that it would be gradual, but for Hong Kong, it really needs this ‘big bang’ for the markets. I mean, the Hong Kong volumes are actually drying up. We saw Alibaba move over to New York. Hong Kong exchanges need something.”

Peter Thal Larsen says, “Yeah, I think that’s right. I mean, definitely there is a lot of hope. And we saw the Hong Kong Stock Exchange – its share price – rise over 5% the other day in hopes that it might be about to sign some kind of agreement. And definitely I think if that were to happen, if there were to be some sort of mutual market access, that would be a big deal both for Hong Kong and for the mainland. Clearly, if Chinese investors could get access to stocks in Hong Kong, that would increase the volumes and it would also help to reinforce Hong Kong’s position as a capital market.

“Likewise, if you could – if investors based in Hong Kong could access the Chinese capital markets more directly than the way they do at the moment… through this system of quotas and so forth, that would also be a big help for Hong Kong. But once again, I think they’ve talked about this in the past and backed away from it. We have this complicated system of quotas for investors going into China and coming out of China. And I think it’s hard to see for the broader, macroeconomic purposes that I described earlier. It’s hard to see anything really big changing on that front any time soon.”

Tara Joseph says, “Mutual market access between China and Hong Kong, it would be a very big bang, but let’s not get our hopes up too soon.”

Bottom line: Neither exchange has pulled the trigger, but if they do… the process will most likely be a slow and steady one.