Dual stock exchange could become the biggest in Asia
Shenzhen and Hong Kong each would have plenty to gain if a link was established
THE creation of a regional stock exchange linking the Hong Kong and Shenzhen markets has been mooted since the Shenzhen exchange opened in 1992 but few believe it will become a reality.
If such an exchange were created, it would combine Hong Kong's international prestige and technical know-how with Shenzhen's links in southern China and support from Beijing.
Such a potent combination could easily outpace Shanghai and become China's premier listing site. One day it could even rise to challenge Tokyo as the largest stock market in Asia.
Shenzhen's market capitalisation will not yet add much to Hong Kong's $2,233 billion but the proportion can grow.
Both sides have plenty to gain. The Stock Exchange of Hong Kong would achieve greater access to mainland companies - something currently limited by China's quota on H shares. Such a move would help it become the main player in China stocks after 1997.
Maurien Yau, head of China research at DBS securities, said many at the exchange were cautiously pushing for the link for this reason.
'Hong Kong really wants to turn into a major stock exchange in China. It doesn't want to lose its position to Shanghai,' she said.
For Shenzhen, the link would help it stem the flow of companies listing in Shanghai. It would also provide much-needed liquidity as it has been suffering from a drought of funds.
The link would also help Shenzhen gain extra gloss in the eyes of foreign investors.
Despite the many pluses, there are plenty of reasons why the link may not happen anytime soon.
Elizabeth Cheng, director of China research at James Capel Asia, said the main obstacle hinged on the fact that neither side was willing to compromise its self-interest.
'A regional stock exchange? I haven't heard of such an 'animal' before. The two sides will find it difficult to sacrifice their interests,' she said.
Negotiations could take years and, even if some accommodation is achieved, there are many difficulties beyond.
One is logistics. Exchange technology is improving in leaps and bounds, but linking two exchanges will be costly and time-consuming.
The Stock Exchange of Hong Kong is so far ahead of its neighbour in technology that some doubt Shenzhen will ever catch up.
Another obstacle is the different quality of the two exchanges' component companies.
Shenzhen-listed companies are considered problematic due to poor disclosure and lack of management accountability.
A Chinese broker based in Hong Kong said: 'B shares are not so bad but A shares have a lot of problems. They must realise they have duties to their shareholders.' B shares are stocks of China's companies that foreigners are allowed to purchase; A shares are for mainlanders only.
With A shares under a cloud, it is unlikely the Hong Kong exchange will risk too close an association with them until they are seen to be smartening up their act.
Another problem is the convertibility of the yuan. At the present time there is no structure for instant conversion of the Chinese currency.
Until this is in place, close links between the two exchanges will remain purely speculative.
While these and other obstacles could certainly be overcome in time, it is doubtful if there is the will to do so at the moment.
Meanwhile, both sides remain tight-lipped about prospects for the link.
The head of public and commercial service for the Hong Kong exchange, Henry Law, said the exchange had considered the proposal but did not yet have any plans.
'It is something that might happen in the long run. When the market is ready, either party could propose it but, at this stage, the market is not ready,' he said.
A further complication is that China's leaders could veto the project if they deem it contrary to national interest.
However, according to Ms Yau, China might well support the project.
'The mainland authorities are keen but they want to do it slowly so nothing goes wrong,' she said.
Beijing would favour linking the exchanges if it led to an increase in efficiency in Shenzhen but not if this came at the expense of Shanghai. However, a link of the exchanges is far from inevitable with many analysts of the belief the two markets will do better if they remain separate.
Ms Yau said there was plenty of room for Hong Kong, Shenzhen and Shanghai to co-exist.
'South China is a huge region with lots of enterprises. Shanghai cannot absorb them all,' she said.
Another analyst agreed.
'In the future, smaller companies might go to Shenzhen while the bigger ones will go to Hong Kong,' he said.
At present, the most likely scenario is that both exchanges will remain separate, especially when the many obstacles to listing are taken into account.
But, as any broker will remind you, in the world of stocks, there are never any certainties.