'It is clear, at least to me, that there would be big advantages if the two markets for these instruments ['A' shares in the mainland and 'H' shares in Hong Kong] were linked: overall liquidity would be increased, price discovery would be made more efficient, market discipline would be promoted and it would be easier for market players, intermediaries and the authorities to manage risk.' Joseph Yam Chi-kwong Hong Kong Monetary Authority LET'S MAKE SOMETHING ELSE clear first. Mr Yam has time to dabble in such things as the settlement workings of equity markets because he isn't quite a central banker in the usual sense of the word. Central bankers in countries that have independent monetary policies must focus their attention closely on such things as inflation and interest rates but it is not necessary for Mr Yam to do this. He runs the peg, a modified currency board system, the exact opposite of an independent monetary policy. Through the peg, the HKMA has surrendered its control of Hong Kong inflation and interest rates to the US Federal Reserve Board. Mr Yam is thus more of a currency board technician than a central banker and if he wants to make his mark he has to do it in some other field than pure central banking. He has chosen to do it in the field of integrating Hong Kong's financial system with the mainland's as much as possible and as soon as possible. His latest idea, published in his two most recent weekly columns on the HKMA's website, runs as follows: Big financial markets are better than small financial markets because there is more liquidity in them and because their size makes them much harder to manipulate. We have the makings of a big market in these H and A shares. Many of them are essentially the same instrument but they are traded in different currencies, cater to different investors and are subject to different regulators. Unfortunately, we cannot unify them immediately. The mainland's closed capital account is an immediate barrier and there are others. Thus we must look for some means of virtual unification and two possibilities immediately arise. The first is we match funds permitted across the capital account barrier. For every investment dollar permitted to cross from Hong Kong into Shanghai we shall permit a dollar to cross from Shanghai into Hong Kong, or less or more, depending on which way we wish to push the balance of payments. The second possibility is to create a mainland equivalent of the American depository receipt. It will give the Hong Kong holder a certificate of ownership in a Shanghai stock and vice-versa. We can then trade these certificates instead of dealing directly in the underlying stock. It all sounds well reasoned but I have two immediate quibbles. The first and more general one is that Mr Yam quoted from Premier Wen Jiabao (is this obligatory for our government officials these days?) to the effect that such arrangements must 'have a high degree of controllability'. Really? I thought it was a market that Mr Yam wanted. The defining characteristic of any real market is that it does not have a high degree of controllability. Take your choice, Joe, what do you really want, a bureaucracy or a market? The second and I think more important quibble, at least to people who deal in Hong Kong's H-share market, borrows from the thoughts of the great financier JP Morgan when he was asked in a US Congressional hearing whether the foundation of modern finance is profits or assets. 'It is neither of these. It is trust,' replied Morgan. I'm not sure I have the exact wording here of what he said on that occasion but I know that I have the exact sense of it and I know exactly what Hong Kong stockbrokers and fund managers think of their Shanghai counterparts. They don't trust those Shanghai brokers. They think they're bandits and the relative pricing of H and A shares consistently demonstrates that this is a widely held view. It should not be an entirely surprising one. In the formative stages of any market economy, there is never much distinction to be made between private and criminal enterprise. The money is run by the rules later. In the early stages the money runs over the rules. But if Mr Yam thinks differently and truly believes there is no difference between Shanghai and Hong Kong other than in some technical details, then I have a challenge for him. Why not put your life's savings into a discretionary management account with one of those Shanghai brokers, Joe, and then see if you can still expect to retire at 65 afterwards. Go ahead. Lead us on. You first.
