Setting up trading unit in Hong Kong seen as quicker route to mainland

Stock Connect expected to allow foreign players to bypass tough rules in push into Shanghai

PUBLISHED : Wednesday, 13 August, 2014, 1:11am
UPDATED : Wednesday, 13 August, 2014, 2:17pm

Setting up a securities or futures firm on the mainland could be a thing of the past for foreign players as reforms bring the onshore market together with Hong Kong, said Xia Yang, the chairman of UBS Futures, which launched this month in Shanghai.

With the much-anticipated launch in October of the Hong Kong-Shanghai Stock Connect, a scheme that will open the two markets for mutual but limited stock trading, foreign companies would be far more likely to use Hong Kong operations to access the mainland market than forge ahead into the mainland's harsh regulatory environment, Xia said.

The opportunity cost to set up a China joint venture … is prohibitive

Mainland and Hong Kong officials yesterday held the first official meeting for the stock trading plan.

"The opportunity cost to set up a China joint venture for securities or futures is prohibitive," Xia said, citing the lengthy time and tight connections needed to establish those businesses on the mainland. "There's even a strategy cost. If you're just setting up your onshore [operations], it could take time to build. You wouldn't be able to focus properly on [the stock connect] or mutual fund recognition.

"If you don't have an onshore China securities house, let alone an onshore futures joint venture or futures subsidiary, then you're going to have to live with what you have overseas or in Hong Kong to service your international clients trading into China."

Mutual fund recognition between Hong Kong and the mainland would be another force that pulled the two markets together, Xia said.

In August last year, Beijing endorsed a Hong Kong government plan to recognise fund products domiciled in Hong Kong and vice versa. The plan is part of the Closer Economic Partnership Arrangement signed last year.

UBS Securities bought 95 per cent of Shanghai Pumin Futures Brokerage in February, a deal that took four years to complete because of regulatory hurdles and sensitivity surrounding complex financial instruments on the mainland, Xia said.

UBS signed an agreement with Pumin in 2010, the same year the mainland launched its first financial futures pilot scheme. During that time, JP Morgan, Royal Bank of Scotland and Newedge Group went on to form joint-venture futures firms with mainland companies.

UBS and Goldman Sachs' Beijing Gao Hua Securities are still the only two mainland securities joint ventures with secondary market licences.

Setting up entirely offshore would not completely replace the mainland operation for foreign companies looking to access domestic clients, said Ben Kwong Man-bun, the chief operating officer at KGI Asia.

"It's still pretty much a natural development to set up a company or a joint venture on the mainland if you want to reach mainland clients," Kwong said, although he noted the difficulty in finding the right partner and working out the conditions for control over the company.

The Hong Kong-Shanghai Stock Connect is a platform for cross-border trading but would not necessarily help Hong Kong firms grow relationships with clients on the mainland, he said.