The foundation of Hong Kong's success as a financial centre is confidence in its free and open markets, without fear of direct government intervention. That confidence is being called into question after the government disclosed that it has, secretly and over a period of time, purchased a 5.88 per cent holding in Hong Kong Exchanges and Clearing through the Hong Kong Monetary Authority. Financial Secretary John Tsang Chun-wah says the motive was not to intervene in the market, but to position the government to play a role in HKEx's future development. Investors have greeted the acquisition with delight, pushing up the price of HKEx shares by more than 20 per cent yesterday, high enough to singlehandedly reverse a market slump that affected other bourses in the region. The question is: why the acquisition? Although HKEx is privately owned, the law provides that the government can prevent anyone else from holding more than 5 per cent of HKEx shares without its approval. Already, the government appoints half the directors on the HKEx board, which is bound by law to act in the public interest. There is no suggestion that the government needed to put further safeguards in place. Stock exchanges have always been free markets here, though the government has always had a hand in guiding their development. For example, the city used to have four stock exchanges, but the government urged them to unify in 1986 to form the predecessor of HKEx for the greater good of Hong Kong. To this day, however, there are still detractors who feel the four exchanges should have been left alone. Even if we accept that the government has a role to play in facilitating the development of financial markets, it is a regulatory role that clearly excludes playing a part directly in the market. No wonder some critics now see its acquisition of a stake in HKEx as tantamount to a referee jumping onto the field to become a player. Hong Kong has reaped huge benefits from local listings of mainland companies. But as the mainland markets mature, there are concerns about how to ensure that the stream of initial public offerings from mainland companies does not dry up. One view doing the rounds holds that the flow could be assured if the mainland saw tangible benefits from continuing to allow such listings in Hong Kong. And what better way of achieving that than by giving the mainland a stake in HKEx? If this theory is right, we could see the government conducting a share swap with mainland authorities for stakes in the Shanghai or Shenzhen exchanges. Should that happen, however, it would also raise the prospect of this financial centre characterised by the rule of law and transparency becoming dependent on a largely policy-driven mainland regulatory regime for future growth and progress. Mr Tsang says the government's HKEx stake will help it forge closer links with the mainland's stock markets. But could that objective be achieved by facilitating closer co-operation between Hong Kong and mainland exchanges on a commercial basis? The government should make a fuller explanation of the thinking behind its unprecedented action.