Integration of Hong Kong and Shenzhen exchanges doable
with Shirley Yam
Every once in a while there are calls for the integration of the Hong Kong and Shenzhen stock exchanges. The latest one came from Professor Lawrence Lau Juen-yee, the vice-chancellor of the Chinese University, who is also vice-chairman of the China Society of Finance and Banking.
As usual, the naysayers, who are understood to include some of the senior management at the Hong Kong bourse, call it 'mission difficult' if not impossible.
The reason they have been giving for the past 10 years is that the two bourses are different animals - Hong Kong Exchanges and Clearing is a listed entity while its Shenzhen peer is no more than a government department with a corporate title.
'This cannot be done,' said a senior HKEx official in a closed-door conference. This response shows not only a lack of creativity but also a failure to grasp what is happening in Hong Kong, the Pearl River Delta and the country as a whole.
Anyone doing serious business on the mainland can tell you that no structural hurdle is insurmountable as long as there is political will or lobbying. Haven't we seen the listings of the old Ministry of Petroleum and the Ministry of Telecommunications which would have been considered 'crazy ideas' 10 years ago?
If an integration of a commercial entity and a government department is technically impossible, how about the formation of a Growth Enterprise Market joint venture between Shenzhen and Hong Kong. This way both bourses would share the benefits. The yet-to-be-launched mainland market will get the much-needed international recognition and the Hong Kong one will indirectly benefit from mainland liquidity.
The opening up of the markets to investors on both sides will be the next step.
Sure, it won't be easy. There are lots of regulatory hurdles, such as who will decide which companies can be listed - HKEx's listing division, the China Securities Regulatory Commission or both?
Whose rules should companies follow after listing, Hong Kong's or the mainland's?
At the moment, the CSRC has little incentive to solve these problems and make automatic cross-listing possible. Unfortunately, its will is crucial here. Let's not forget, the Shenzhen Stock Exchange is no more than one of its departments.
As an institution, the commission cares little about the development of the Hong Kong market despite the wishful thinking of some of our leadership. Its interest is within the local bourses and players.
It will also be hard to convince the bureaucrats to give up part of their approval power when it comes to automatic cross-listing. It's about political, if not financial, interests. (Given the transparency and rule-based approval process of HKEx, it should be less of an issue with Hong Kong.)
Despite these drawbacks, I still see the integration of the Hong Kong and Shenzhen exchanges as a doable option. Here's why.
While we are jumping up and down about competition from Shanghai, our neighbours across the Lowu bridge have a more real fear of marginalisation than us, given what has happened over the past decade.
When Beijing unleashed a tax reform to grab fiscal income from regional governments, who had the greatest freedom to lose? Guangdong.
When Beijing acts to reduce the number low value-added factories, where do we find their highest concentration? The Pearl River Delta.
When Beijing beefs up environmental protection, where do we find most of the polluting factories? The Pearl River Delta again.
When the State Council talks of making Shanghai the international shipping hub, where does that put Shenzhen?
It is therefore not surprising to see Guangdong officials, who in the past have been put off by the arrogance of their Hong Kong counterparts, opening their arms to the city again recently.
Riding on Hong Kong's political importance and the sophistication of its tertiary industry is the only straw for the Pearl River Delta to clutch in the long run.
But isn't it equally true for Hong Kong? Marrying our strategic importance with the political know-how of the regional authorities does give Hong Kong a way into Beijing's corridors of power.
In this sense, the integration of the Hong Kong and Shenzhen bourses is not an impossible mission; neither are many other financial adventures between Hong Kong and the Pearl River Delta.
However, judging from two 'abnormal' public speeches this week, many in our public and private sectors have yet to get it.
On Wednesday, a Guangdong securities regulator turned up at a Hong Kong conference with a long wish list for our officials to mull over. Among them was calling on Hong Kong officials 'to lobby Beijing' to allow Guangdong investors to trade Hong Kong stocks and to have the trades handled by joint ventures between Hong Kong and mainland brokers.
It's not the practice for mainland officials to go public with their demands if they sense the other side is taking them seriously.
On the same day, a Hong Kong regulator called on local brokers to act on the month-old policy to allow Hong Kong securities firms to set up joint ventures in Guangdong to carry out investment advisory business. Local brokers were asked to 'promptly embark on the preparatory work' and 'to explain their business models to mainland regulators'.
Obviously, our brokers have yet to appreciate the economic benefit of providing unprofitable advisory business in one single province.