Mainland 'not ready for through train' stock trading between Hong Kong and Shanghai

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.