Through train's exclusive use of yuan a hurdle for Hong Kong investors
The single-currency concept employed by the through train makes it easier for mainlanders
Beijing obviously wants to use the through-train cross-border trading scheme to encourage investors to use the yuan to trade stocks.
To succeed, however, it has to do more to make it easier for international investors to obtain the yuan they need.
Hong Kong Exchanges and Clearing released more details last week of how the through-train scheme will work, starting in October, when mainland investors will be able to trade Hong Kong-listed stocks, and the city's investors will be able to trade A shares in Shanghai, up to a combined quota of 550 billion yuan (HK$690 billion).
Prices will be quoted only in yuan. That is not surprising, for China has been promoting the use of the currency for trade and investment since 2009 although Beijing has not allowed the yuan to be fully convertible.
However, the People's Bank of China appears to have failed to take into account the difficulties international and Hong Kong investors face in obtaining yuan, which is likely to make the A-share markets less alluring.
There is also the question of unequal treatment of mainland and Hong Kong investors.
Under the scheme, mainland investors who want to trade Hong Kong stocks will have an easier time. To settle their trades, they will just need to pay their brokers in yuan.
The brokers will pass their money and orders on to the Shanghai Stock Exchange, the clearing house of which will handle the conversion with HKEx into Hong Kong dollars. The mainlanders will not have to worry about how to obtain Hong Kong dollars.
Hong Kong investors who want to trade Shanghai shares, however, will need to find yuan to pay their Hong Kong brokers.
It is puzzling why Hong Kong investors will not be allowed to pay in Hong Kong dollars and let the exchanges' clearing houses do the conversion.
Hong Kong investors may recall the HKEx has something called the "RMB equity trading support facility", operated by the local securities clearing office, which is supposed to help companies issue yuan shares to be listed in Hong Kong, where investors who have a difficult time getting yuan can trade them using Hong Kong dollars.
Because there are few yuan shares listed in Hong Kong, this facility has almost faded into oblivion. The through-train scheme would be a perfect way to put it to good use.
Unfortunately, the HKEx circular shot the idea down and said this facility "will not be available for SSE [Shanghai Stock Exchange] securities trading initially. Brokers should ensure they or their clients have sufficient [yuan] to settle SSE securities trades".
Without the use of the support facility, Hong Kong investors will have no choice but to go to the bank for their yuan.
However, individuals in Hong Kong can exchange only up to 20,000 yuan a day. Even after a long lobbying effort by the Hong Kong Monetary Authority, the PBOC and other related authorities have not agreed to raise the cap.
When investors are unable to readily obtain the currency they need to trade, they might just give up on the scheme.
If Beijing really wants to make the through train work, it has to remove the 20,000 yuan daily exchange cap.