Let's hope Hong Kong reputation finds a seat as through train sets off

Amid hype for cross-trading system, ponder how city's regulators will fare when chasing the crooks who hitch a ride on our global standing

PUBLISHED : Saturday, 12 April, 2014, 12:56am
UPDATED : Tuesday, 28 April, 2015, 11:23am

What does the so-called through train scheme mean to Hong Kong? You have probably read a lot about the goodies that are going to come as investors in Hong Kong and Shanghai are allowed to trade in each other's market. Yet everything comes with a price.

After contributing money and know-how to the country's economic reform over the past decades, we will now be chipping in our reputation - their most needed and our most precious asset - via the through train scheme.

Dollar signs aside, the scheme represents an aggressive "mutual recognition" between two regulatory regimes that are millions of miles apart in every aspect. To cut a long list short: ours is rule-based; theirs is "man-based". Our government stays away from the market; theirs talks the market up and down. Our legal system is trusted; theirs is not.

Everything comes with a price … this scheme is a beauty and the beast marriage

The scheme is a marriage of the beauty and the beast.

Mind you, even marriage between beauties is rare. There are mutual recognition schemes within the European Union; between Australia and New Zealand; and between the US and Australia. The latter was shelved after the 2008 financial crisis.

Allowing companies that are not subject to local regulations to trade at home is an ultra-sensitive issue for every regulator. Yet, in six months, hundreds of mainland companies - beyond the reach of our regulators - will be trading in Hong Kong.

Beijing needs this marriage to happen. It is not so much because of the 300 billion yuan inflow that will breathe life into Shanghai's stale A-share market; or the 250 billion yuan outflow to Hong Kong to alleviate an investment spree that has been pushing up asset prices.

It is much more about finding a long-term cure for its dysfunctional stock market, one of the key stumbling blocks to its economic reform. For years, Beijing has been talking about the importance of cultivating a better mix of investors - instead of just short-term punters - to change the behaviour of the market, listed companies and even the regulators.

More international investors, in particular institutional ones, will help. But capital control makes it impossible to further remove the constraints of the qualified foreign institutional investor scheme. The weaker the market is, the more difficult it is to open it up.

An offshore A-share market in Hong Kong is the best solution to the deadlock. The A shares will get more international investors, thanks to the reputation and depth of our market. The capital flow of these international investors will be cordoned off from the mainland system, minimising any negative impact on its financial system.

But every pricing signal and corporate vote will be felt by the mainland market. These will eventually translate into healthy pressure on its participants, companies and regulators. At least, that is the wish.

This tune sounds all too familiar. We have heard it since the 1993 listing of state-owned enterprises in Hong Kong. Whether bringing in international investors will improve things this time is anybody's guess.

The big question for Hong Kong is what happens when people jump on to the A-share bandwagon with good faith in the integrity and power of our regulatory regime. What damage will it do to our reputation when they realise we have no jurisdiction over the A-share companies?

Try reminding an investor in Sicily of the "buyer beware" warning when a company he or she has invested in is found to have been cooking its books and our regulator cannot get hold of its chairman or its audit papers.

Try to tell him or her to wait for the China Securities Regulatory Commission (CSRC) to act on the case. The length of the waiting will depend on how well connected the people cooking the books are.

Count the number of mainlanders on our wanted list and one will see this imaginary case isn't too far fetched. And in the case of A-share trading in Hong Kong, our regulator won't even be in a position to put the crooks on the wanted list.

To be fair, the accord signed by the Hong Kong and mainland regulators promises further co-operation and information sharing to combat insider dealing, false declarations and market manipulation.

Some optimists also argue that opening up the Shanghai market to foreign investors and, therefore, manipulation, will quickly lead the mainland authorities realise their limits in enforcing their rules offshore.

To secure help from international regulators, the mainland authorities will align their approach with the rest of the world, according to several regulatory sources.

The sincerity and willingness of mainland authorities such as the CSRC - who care about the well-being of the A-share market - in rooting out the weeds should not be doubted. The problem is most do not.

Imagine the CSRC telling the People's Liberation Army to give up its man in relation to a fraud investigation. If it cannot be done now, why will it be different because the stock is trading in Hong Kong.