Taking stock
What does it mean when the government says it is unhappy with the equity markets - as a senior financial official told the press last month? Apparently it means that the administration is unhappy with the stock exchange. Indeed, senior officials became so unhappy that they felt they needed to own a sizeable chunk of it. On September 7, the Monetary Authority (HKMA) informed Hong Kong Exchanges and Clearing that it had acquired 5.88 per cent of its shares.
The discontent apparently began to brew as a result of the government's desire to develop a price-equalisation mechanism between A and H shares. The former are shares of mainland companies listed on mainland exchanges, which foreign investors are not allowed to buy. H-share companies are incorporated on the mainland and approved for listing in Hong Kong.
Mainland markets are red hot. The Shanghai Composite Index has increased by more than 350 per cent in less than two years. The Hong Kong stock market is on fire too, but is not quite so hot. A-share prices are now trading higher than their H-share counterparts in Hong Kong. As a result, mainland companies are keen to list on the mainland instead of in Hong Kong.
But thinking can change as market conditions change. Current talk is all about the mainland's stock market bubble, its size and when it will burst. Bubbles do burst, but it is hard to predict when.
Our financial officials want to develop some mechanism to close the price gap between A and H shares, in the belief that this will help Hong Kong remain the market of choice for mainland companies to list. They seem to fear that Hong Kong is being marginalised, and won't be able to grow as a financial centre unless this is done. The HKMA envisages a scheme in which a body jointly owned by itself and the People's Bank of China would trade shares in the Hong Kong and mainland markets, to achieve price equalisation. Presumably, whenever there was a degree of difference in the share price of a stock listed in Hong Kong and on the mainland, the body would buy from the cheaper market and sell to the more expensive one.
I must admit to having problems understanding their thinking. It sounds like nothing less than massive intervention. Perhaps government officials could spell out their ideas more fully as to why such a mechanism is desirable and how it would work. They need to share their wisdom on a number of key issues. First, they need to address the fact that the natures of the two markets are quite different. For example, the listing, settlement and regulatory regimes are different, and investors inside and outside mainland China are not allowed to trade in each other's markets, with limited exceptions.
Second, they must explain how their idea of the mechanism would affect the mainland's capital controls; and third, they need to clarify exactly how a price-equalisation mechanism would work, because there are many technical complexities involved.
Finally, they should tell us how they see the mainland bubble. What will happen when it bursts? Is their idea derived from the 1998 stock market intervention in Hong Kong, when the government bought large amounts of shares to keep prices up? Is the HKMA essentially proposing to mainland authorities that, when the bubble bursts, there could be some Hong Kong-mainland collaboration? But why not just let the bubble burst, or is such a thought 'unpatriotic'?
Although I am a non-executive director of the stock exchange, I have no insider information or perspective into how our key officials think. Perhaps what they don't like about the stock exchange is that it's not voicing ringing support for the idea of the price-equalisation mechanism.
Will the government now exert its muscle as a minority shareholder to lead us down a treacherous path? Such a controlling mentality would hardly be positive for Hong Kong as an international financial centre.
Christine Loh Kung-wai is chief executive of the think-tank Civic Exchange
