The View

Hong Kong’s free market stands in contrast to mainland China in wake of rout

PUBLISHED : Wednesday, 15 July, 2015, 12:18pm
UPDATED : Wednesday, 15 July, 2015, 5:07pm

There is a silver lining to the rout and panicky response to the rout in Mainland stock markets because it provides a golden opportunity for the Hong Kong stock exchange. However political correctness seems to have induced an outbreak of coyness among the folks who run the exchange.

Yet the facts speak for themselves. Not only has it long been cheaper to buy most blue chip mainland-listed counters in Hong Kong but, as we now know that these transactions can be made without concern that the shares can be taken off the market when the going gets rough.

Moreover there is no fear of a Hong Kong policeman knocking on your door if you chose to play the market by using derivatives such as short selling because it is well understood here that this is part and parcel of a free equity market.

Strangely enough the only official that has come close to making this point is the Financial Secretary John Tsang Chun-wah who posted a blog, ostensibly lauding the ‘one belt, one road’ initiative, but in passing noting that the Hong Kong stock market weathered the recent storm by trading in a smooth and orderly fashion.

Tsang has been feasting on Beijing Duck for long enough to appreciate that no direct criticism of the Mainland’s handling of the rout can be permitted so he was careful to not actually draw a comparison, yet even the dimmest reader of his words should be able to understand their meaning.

Meanwhile some of Hong Kong’s most savvy stock market participants have been far more candid in flatly saying that the way the turbulence was handled has produced an enormous setback for China’s ambitions to establish an international standard market.

Free market purists, as ever, have been highly vocal on this subject, flatly stating that governments have no business interfering in markets. However this view is idealistic in the extreme because governments routinely intervene. In the United States we have seen a very long period of official policy to suppress interest rate levels both to encourage economic growth and to maintain the health of the stock market. Other governments fiddle around with levies and taxes on stock trading, while yet others use public money to boost their markets.

However there is a line and it was crossed many times by the Chinese authorities in a number of ways, perhaps most seriously with bans on selling shares and the extraordinary leniency shown to companies who applied to suspend trading.

It is not as if the people at the coalface of the Chinese stock markets are not aware of the dangers of these interventions. On the contrary they are vividly conscious of the consequences but they are not their own masters and they are subject to edicts from the centre where there is a strong desire for a healthy equity market but little understanding of the degree to which this requires toleration of turbulence and the rapid price falls that follow rapid price rises.

Nor can it be ignored that much of the steam that percolated through the Chinese stock markets was officially generated.

Because they don’t understand how markets work, the bosses in Beijing are seemingly oblivious to the consequences of their action. They just don’t get the message they are sending out.

It is that if you want to be sure that an investment in China’s stock markets will be determined by boring old supply and demand: forget it. Moreover if you are worried about your funds being stuck in the market with a blocked exit route, you have yet another reason to keep away.

It may be argued that Hong Kong is hardly immune from these shenanigans because prices here fell pretty much in line with those on the markets across the border. However daily price fluctuations are not to be confused with the institutional self-inflicted damage on the Mainland.

So far Hong Kong’s market has suffered no blotch on its reputation, however the local stock exchange is far too busy thinking up ways of boosting cross border market integration and is thus volunteering for a form of contagion that it absolutely does not need to have.

Instead of integration Hong Kong should be shouting from the rooftops about its role as the safest and most efficient centre for trading Chinese equities. It should not be coy in emphasising the differences between the two markets and the two very different regulatory regimes, not least making the point that market regulators in Hong Kong are subject to the jurisdiction of an impartial judiciary that can and will ensure adherence to the rules.

The chances of any of this being spelled out by local officials range from nil to somewhere below that level. The political price is just too high.


Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster