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Jake Van Der Kamp

'... the partitioning of a market trading essentially the same financial instrument with the same shareholders' rights undermines the efficiency of the market.'

Joseph Yam Chi-kwong,

Hong Kong Monetary Authority

THE OCCASIONAL TROUBLE with our monetary chief's thoughts on the business of stockbroking is that he is not a stockbroker.

Nor is he really a banker. He is a career civil servant and the latest of his regular weekly columns on the HKMA's website shows it.

Mr Yam's lament was that there is a continuing share price difference for mainland companies with dual  A-share listings in the mainland, which are denominated in yuan, and  H-share listings in Hong Kong, which are denominated in Hong Kong dollars. The Hong Kong market tends to set a higher price on them, particularly for recent liquid issues such as Industrial and Commercial Bank of China.

'I understand that foreign exchange controls on the  mainland play a part in this process but it still seems desirable for the healthy development of the market to remove artificial market partitioning,' he wrote.

You are absolutely right about the foreign exchange controls, Joe. A country with a closed capital account is at a distinct disadvantage relative to one with an open capital account when it comes to pricing stocks that have an international following. The Hong Kong dollar is freely exchangeable. The yuan is still funny money.

This alone is enough to explain  what you call 'partitioning' and the only thing artificial about it is the mainland's exchange controls.

Your remedy is to tell Beijing to open its capital account. That's the way to get your 'healthy development of the market'.

But there is more, of course. In Hong Kong we have relatively honest stockbrokers who don't rip you off as a  routine practice.

There may be a few of them in Shanghai, too. Hunt hard and perhaps you may find one, perhaps not.

Hong Kong also has liquidity in these issues and this means a great deal. These dual listings exist only because of complaints in the mainland that the foreigners were getting all of China's jewels and domestic investors were being shut out.

Whether true or not, this makes adopting  A-share and H-share listings a political decision rather than a commercial one.

The commercial decision is obviously for the  H-share version with its free currency, greater liquidity and more trustworthy brokers.

There is no undermining of the efficiency of the market here. The trend rather establishes the efficiency of the market. These two financial instruments are not actually the same. The one is better than the other. The one therefore attracts the higher price.

Let us get it straight: This is not a moral question of right or wrong but purely of investor preference. If people in Shanghai think it unfair, they are best advised to go to the very top and take it up with God.

More than that, Joe, what you have here is proof that there truly is great value in Hong Kong's open marketplace, its rule of law and the size and respectability of its financial institutions. Why should you now want to negate these advantages when you are otherwise happy to extol them to the world?

And why, in particular, should you want to negate them through such a daft idea as setting up 'a specially established public organisation on a non-profit basis, conducting arbitrage whenever a significant exchange-rate-adjusted price differential appears'?

I can see why you would call it a non-profit organisation. There certainly would be no profit in it, just loss. If you were to short H shares and buy A shares every time Hong Kong prices exceed Shanghai ones, you would soon hold a massive portfolio of yuan-denominated A-share stock.

If you were then to try sell any of it to balance that portfolio, you would only make the price differential greater and the howls of protest would make you stop.

How far are you willing to go? Do you really want to load us up again with HK$120 billion of stock as you did in 1998 and then get even the US Federal Reserve Board on your neck once more telling you it was irresponsible conduct?

The fact is, there are plenty of arbitrage sharks out there looking every minute for even a fraction of a cent difference between the prices of any financial instrument traded in two locations. If they do not think there is anything to be gained by arbitraging H shares and A shares, there is good reason to believe it doesn't exist.

What you have come up with here is a typical bureaucratic solution to a problem that does not even exist. I would have thought that you had been on your job long enough now to rise above that sort of civil servant ignorance of how markets work. Apparently not.



Yam's bureaucratic solution addresses problem that doesn't exist