The first so-called through-train proposal for mainland investors to buy Hong Kong shares is remembered for helping drive a red-hot local share market through the 30,000 level in 2007 before state leaders applied the brakes amid concerns about currency outflow. Amid ongoing reform, the latest version, allowing direct, two-way share trading between Hong Kong and Shanghai, has not caused the same excitement, but is more significant. It is not about helping Hong Kong but the latest step in China's agenda of capital market and international economic reform. It can only be positive for confidence in China - and Hong Kong.
In a move that lifts capital controls on up to 550 billion yuan (HK$692 billion) of stock transactions, mainlanders will be allowed to trade stocks on the Hong Kong exchange through mainland brokers and the Shanghai exchange, and Hong Kongers will be allowed to trade on the Shanghai exchange through local brokers and the local exchange. It is a major step towards integration of the Hong Kong and mainland capital markets. Indeed, People's Bank of China governor Zhou Xiaochuan says the move will consolidate Hong Kong's status as an international market while raising the capacity of the mainland stock markets.
The key implications, however, are about liberalisation of China's capital markets. In the short term the focus will be on the arbitraging of H shares against mainland A shares. This will be good for local brokers, because the daily quota that can be traded in Hong Kong relative to daily turnover it is not insubstantial. This will raise liquidity in Hong Kong's capital market and increased trading volume will be good for the exchange and its share price. In the long term, the through-train scheme is significant for what it says about the importance of Hong Kong to China's capital market reform, the centrepiece of internationalisation of the country's economy.
Hong Kong Exchanges and Clearing chairman Chow Chung-kong says the scheme will be as important to Hong Kong as the H-shares listing 20 years ago. The easing of capital controls is the latest incremental liberalisation, which could easily be extended to a range of other asset classes, including bonds and commodities. Sooner or later reform will test the relevance of the Hong Kong dollar. If trade and financial commitments can be settled in yuan, it becomes a more convenient currency to use.