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  • Dec 21, 2014
  • Updated: 4:26am
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Mainland 'not ready for through train' stock trading between Hong Kong and Shanghai

Market watchers say the economy has yet to establish the preconditions needed to allow mutual stock trading between HK and Shanghai

PUBLISHED : Tuesday, 15 April, 2014, 12:46am
UPDATED : Tuesday, 15 April, 2014, 10:35am

The "through-train" scheme to allow mutual stock trading between Hong Kong and Shanghai marks the mainland's latest effort to open up its capital account, yet market watchers doubt whether the nation is ready for a safe opening.

Economists argued that some preconditions to open the door - allowing Chinese to invest overseas and foreigners to invest onshore - has not been fully established. These also include a sound banking system, a healthy property market and sufficient risk education to mainland retail investors about global markets.

"The trend for further liberalising the capital account control is clear, but the risks can't be ignored," said Zhang Zhiwei, the chief China economist at Nomura. He also warns of a potential blow to the property sector if cross-border capital flows become volatile.

Premier Li Keqiang on Thursday pushed the start button of the so-called through train scheme, a programme to link the Hong Kong and Shanghai exchanges, making cross-border trading possible.

Permitted quotas in the initial phase are set at 300 billion yuan (HK$377 billion) for the "northbound through train" and 250 billion yuan for the southbound through train. While a simple calculation implies the total quota would be exhausted in a month, the Chinese regulator has left the door open for adjustments.

Economists worried that liquidity in three domestic financial markets - bank savings, property and wealth management products - could shrink significantly if the through-train scheme is expanded.

"You have no idea how much hot money is within China and thus you cannot evaluate how asset prices, especially for property, would be impacted if you allowed the capital to flow out of the border. The capital account liberalisation has to take place gradually," said DBS economist Nathan Chow.

China has the world's highest saving rate, with more than 43 trillion yuan sitting in banks at the end of 2013 suffering from negative real returns. The property market is the major investment destination for Chinese citizens, but it has suffered from cooling measures for years.

"I'm concerned about the excessive liquidity and rampant speculation on the mainland market. Investors are rich but lack expertise and skills," said Tan Yalin, dean of the China Forex Investment Research Institute. The through-train scheme is also viewed as a move to fulfil China's ambition to make its currency fully convertible.

China has allowed the use of yuan to settle trades since 2009. Its use has grown from zero to account for 18 per cent of the nation's total trade last year.

"The global foreign exchange use of renminbi will largely depend on whether foreign or Hong Kong-based institutions are taking up these trading opportunities," said Alex Medana, the director of securities markets in the Asia-Pacific for Swift.

HSBC China economist Qu Hongbin said capital account liberalisation should not be viewed as a threat to financial stability as long as Beijing places a quota system to control the two-way flow.

"There has been a misconception that China should get everything ready before opening up its capital account. This is wrong. Introduction of more foreign capital, especially from top institutional institutions, is a key way to help fix the debt problem, liquidity mismatch and shadow banking problems," Qu said.

A mature bond market will satisfy the liquidity crunch for private firms, he said.

Sean Darby, global equity strategist at Jefferies, said there should be no reason not to extend the programme to other listed financial products or asset classes like bonds or commodities. "Longer-term, the introduction of mutual market access puts a timeline on the Hong Kong dollar's role as a medium of exchange within the Hong Kong economy," Darby said.


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This article is now closed to comments

I always regard myself as one of the most optimistic China observers.
But in this respect I pale into insignificance when compared with those bankers, located in Hong Kong or elsewhere.
Read the article ‘China’s unstoppable market liberalisation‘ published by the morning post, and one can’t avoid having the feeling that the author is really excited and thrilled by the coming new opportunities of making much more money !
It always seems to me that most bankers want China to open up her capital account as quickly and as fully as possible.
Problem is, ‘(i)f China eases restrictions on cross-border capital flows, an unexpected shock could trigger large-scale capital flight, bringing down the entire financial system.
Given this, it is vital that China maintain controls over short-term cross-border capital flows in the foreseeable future.’
And according to Stanley Fischer, the preconditions for successful capital account liberalisation are a stable macroeconomic environment, a sound banking system and developed financial markets.
Of all three China seems to have none.
'Introduction of more foreign capital, especially from top institutional institutions, is a key way to help fix the debt problem, liquidity mismatch and shadow banking problems.'
I hope Mr. Qu can explain in more detail how the foreign top financial institutions can help China better solve the above problems, if they can't be solved by the country herself.
To me, it's exactly the foreign capital raised by those foreign top financial institutions which enters China, in the form of property and other loans, together with those carry-trade hot money, that have partly caused the rising debt problem, liquidity mismatch and shadow banking problems.
Of course those foreign institutions and hot money are not evil-minded, but they are in essence funding part of those Ponzi-scheme-like loans.
The Law of Unintended Consequences always reigns supreme.


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