Warming ties hint at HK's growing strategic importance

There is more room for co-operation between Shanghai and Hong Kong than competition. The significance of our co-operation also goes beyond competition Shanghai vice-mayor Tu Guangshao, January 21 To many, this may be no more than official jargon. But to those in the know, this is a public sign of the warming relationship between the Hong Kong and mainland stock markets, which has been icy for more than two years. More importantly, behind the warming ties is perhaps the elevation of the status of the Hong Kong stock market in the eyes of Beijing from the political to the strategic. To understand its significance, let's start with the three Ws - who, where and how. Mr Tu is no ordinary provincial bureaucrat. He was the deputy chairman of the China Securities Regulatory Commission and a high-flyer who was parachuted to Shanghai in May last year. This is an official with excellent Beijing connections and an excellent understanding of top policy. Mr Tu was speaking at the signing ceremony of the closer co-operation agreement between the Hong Kong and Shanghai exchanges. The signing, which until very recently was scheduled to be held behind closed doors, like another accord in 2002, was done in the trading hall of the Shanghai exchange in front of domestic and international press, at the request of the mainlanders. The signing was the only picture on the front page of Shanghai Securities News, an official paper of the Shanghai exchange, followed by a detailed report of Mr Tu's remarks. Preceding the ceremony was an hour-long working-level presentation by both sides. During the ceremony, the chief executives of both exchanges delivered their plans for this year. The accord itself is no less meaningful. Sixteen years after the signing of the first agreement between the two bourses, this accord is the first one that promises an annual meeting of their senior officials, on top of ongoing information sharing, product development and personnel training. These are understood to have been initiated by the Shanghai exchange late last year. In short, the mainlanders want the message of co-operation not only loud but also solid. Considering the long rivalry between Hong Kong and Shanghai, it is difficult to imagine this has happened because of the sudden awakening of individual officials without clear direction from Beijing. In fact, there are also signals from the central government of the warming relations. A month ago, CSRC vice-chairman Yao Gong visited his Hong Kong counterparts and named, for the first time, a 'free to come and go' principle that would apply to the listing of mainland enterprises either in Hong Kong and on the mainland. Shortly after this, another key official came to Hong Kong. In a closed-door meeting with Chief Executive Donald Tsang Yam-kuen, the chairman of the State-owned Assets Supervision and Administration Commission, Li Rongrong, reaffirmed the policy of listing major enterprises in Hong Kong. Investment bankers can already feel the change. 'Officials no longer tell us not to waste our time applying for a Hong Kong listing,' said one. This is in sharp contrast with what has happened since 2005. In an attempt to develop its stock market, Beijing has discouraged both state-owned and private companies from listing in Hong Kong. Only companies with special needs and a meaningful size are allowed to undertake a dual listing. The changing mood goes beyond the listing of more firms here. The Hong Kong exchange recently announced a plan to launch derivatives on an A-share related exchange traded fund later this year. This would not have been possible without a nod from up north. Remember how the Singaporeans were forced to quit a similar plan when the Shanghai exchange threatened to sue? Remember how Beijing signalled the exchange to stop a study of yuan-related derivatives way before it began? Both ideas have been killed in the name of stability and risk. With the financial tsunami fresh in mind, the HKEx's latest plan would have easily suffered the same fate without strong backing from above. But it did not. This opens up all kinds of possibilities. Just imagine the trading of Hang Seng-related derivatives in Shanghai one day. The natural question is what has led to the change. Or to be precise, what has happened in the past few months that gave rise to change? The political importance of the continued prosperity of Hong Kong's financial market has remained ever since the return of Hong Kong to China in 1997. However, experience has told us this has not made Hong Kong part of the China team. The 'we-against-them' sentiment prevails in Beijing's corridors of power, not to mention those of Shanghai. A more credible answer is perhaps the financial crisis, which has caused Beijing to review its development model and therefore the strategic importance of Hong Kong in bringing the country stable growth and a stable market. Indeed, beyond the financial horizon, we have already seen the release by the country's top planner of the Pearl River Delta development plan, which lays out a detailed framework for Hong Kong, the first of its kind. But policy alone is not sufficient in making us a member of the China team. Mainland bureaucrats may have been humbled by the ongoing financial crisis, but the 'we-against-them' sentiment has changed little. Only a humble, proactive and sharing approach on the side of Hong Kong can really break the ice.