New York a step too far for Shanghai
Twenty years ago, on a flight from Beijing, I had two Mao-suited mainlanders draped over my lap as the aircraft banked steeply into Kai Tak airport. No question what they thought of Hong Kong, as they took advantage of my window seat. Hong Kong was China's future and the gleam in their eyes reflected just how badly they wanted the goose to keep laying its golden eggs.
Today, with Hong Kong's spirits echoing the slump in its stock and real estate markets, it is worth recalling that early buzz. However fast the Shanghai skyline might be growing, Hong Kong has a good shot at remaining China's New York.
Why? Because, as a financial hub, Shanghai isn't even close in terms of rule of law and regulatory depth, which in turn provide risk mitigation. Put the two side by side, allow capital to move freely between the two and just see what arbitrage and greed will do.
This is not just conjectural. In recent months, authorities have been dropping hints that a new investment vehicle will be created to channel mainland savings into Hong Kong equity markets. The first funds, called qualified domestic institutional investors, or QDIIs, may be set up in time for the SAR's fifth birthday on July 1.
Local mainland brokers Shenyin Wanguo and First Capital are popular bets as the pioneering funds, to be capped initially at US$3 billion, according to yesterday's China Daily.
'The impact is going to be horrible on Shenzhen and Shanghai,' one broker said. 'Their markets are an accident waiting to happen. They're like Nasdaq in 2000 or Japan in the 1980s. Some companies trade at 60 times earnings.'
The same broker argued that QDII signals the first move in integrating China's and Hong Kong's financial markets. Over time, such integration will have dramatic effects. The economics have a certain raw simplicity - HK$24 billion is a huge shot in the arm for the Hong Kong market, with a turnover of HK$5 billion to HK$6 billion daily. For political reasons, the funds are likely to be limited initially to Hong Kong-listed mainland companies, with the likely result of sending their prices in a straight line up.