The good times are back with a vengeance in Hong Kong. Riding a wave of mainland company listings and rising fever, the Hang Seng Index has, in recent months, repeatedly reached new heights. Everyone seems to be day trading. And the property market has recovered its swagger after a long slump.
But, early this month, Premier Wen Jiabao poured cold water on the party. He announced that Beijing was not yet ready to give the green light to a much-hyped plan to let individual mainlanders invest in Hong Kong stocks.
A delay was necessary, he said, because of the need for, first, further consultation among relevant regulators; second, more study of the potential impact on Hong Kong; third, thorough education of mainland investors on the entailing risks; and fourth, contingency planning to minimise capital outflows from the mainland financial system.
Some observers believe Mr Wen's real intention was to prick Hong Kong's rapidly inflating share-price bubble. If so, it is probably a superfluous move, as the ripple effect from the US subprime-mortgage crisis will get the job done anyway.
Rather, one fear of Chinese authorities seems to be the possibility that mainland investors will lose their shirts to sophisticated Hong Kong speculators. But this is also an odd reason to derail the so-called 'through-train'. The essence of the scheme is to allow mainland retail investors to buy Hong Kong stocks directly through the Bank of China's Tianjin branch.
Since the State Administration of Foreign Exchange's initial announcement on August 20, it is true that investors' anticipation of massive capital inflows into the Hong Kong market had driven up the Hang Seng Index by almost 40 per cent at one point. Nevertheless, it is hard to argue that any mainland investor who would play this market would be ripe for exploitation. The average valuation of Hong Kong shares is only about one-third that of the mainland's A-shares. Clearly, mainland investors are already not very prudent. If anything, it is mainland companies listed in Hong Kong (the so-called H shares) which are looking to exploit such irrational exuberance of mainland investors through dual listings on the A-share market.
Even if the through-train goes forward, this gap in valuation between A shares and H shares is likely to persist. In the absence of perfect capital mobility, it is difficult for investors to fully realise arbitrage opportunities. In fact, there is not even a short-selling mechanism on the mainland because such transactions are banned.
