Yi Xianrong

 

Almost two months have passed since the State Administration of Foreign Exchange (SAFE) announced the launching of a trial program allowing mainland residents to directly invest in stocks traded on the security market in the Hong Kong Special Administrative Region (SAR).

 

Dubbed as the "express train to the Hong Kong Exchange", the project would open for the first time private investment in overseas security markets. Its start, originally scheduled in September, has now been delayed and guesses abound about its initiation.

 

Many analysts in Hong Kong said that the permission would result in sweeping changes to the stock markets in the SAR and the mainland and boost prosperity for the two. The Hong Kong stock market was also of similar view.

 

The decision-makers in the central government have displayed prudence in suspending the project to allow full consideration of the technical details. Liu Mingkang, chairman of the China Banking Regulatory Commission, told the Financial Times last month that there might be certain limits to the direct investment.

 

However, judging from the current market situation in Hong Kong, the mainland as well as the world, it may not be good to launch the project in the short term.

 

The most important element for the success of the "express train" in achieving its goals, including boosting the mainland and Hong Kong stock markets, and easing the pressure on the constantly rising foreign exchange reserves, is the timing of the project.

 

Any public policy depends on timing, economic sentiment and market conditions to achieve its original targets. If it is implemented at the wrong time, it could be abused by certain institutes or individuals to their advantage or even hinder the policy goals it is meant to meet.

 

In the last six months, the international financial market has been hit by the subprime mortgage financial crisis in the United States. Global financial fluctuations stopped immediately after the US Federal Reserve decided to cut the interest rate on September 18, and gold and crude oil prices rocketed to a historical high.

 

Lowering interest rates makes it cheaper to take out loans, which is the reason for the instant recovery of investors' confidence and order in the capital market. However, it also means pouring more money into the global capital market which is already suffering from excessive liquidity.

 

A financial crisis that threatened to hit the world money market has been averted for the time being, but a much bigger danger could be looming in the future.

 

Against such a backdrop, the speculative investment is flowing into stock markets all around the world, especially Hong Kong.

 

The benchmark Hang Seng Index rocketed to 28,569 on Wednesday. It was only 21,595 on August 20. The growth, nearly 8,000 points in less than two months, was coupled with similar strong momentum in the China Enterprise Index, which gauges the performance of mainland companies.

 

The daily turnover of the Hong Kong Exchange has gained continuously in recent weeks, propelling share prices.

 

If mainlanders, most of whom are far from seasoned investors, put their money into the Hong Kong stock market at this time, they face the big risk of a market correction and losses.

 

As a matter of fact, many mainland residents, especially those living in South China close to the SAR, have managed to invest in the Hong Kong stock market through various means.

 

A daily turnover of HK$50 billion ($6.45 billion) used to be unusual for the Hong Kong stock market in 2006, but the daily turnover of Wednesday, HK$153.4 billion, is astonishing.

 

The total market value of mainland enterprises listed in Hong Kong has climbed so high that it is almost beyond the market value of Hong Kong companies.

 

Thus, the sentiments of mainland investors and the speculative atmosphere in the mainland stock market might affect the Hong Kong bourse once individuals are allowed to invest directly in the SAR.

 

Such a trend may not be obvious or dramatic at the beginning, but it would be unstoppable. If that happens, the speculative atmosphere might affect the relatively mature market in the SAR, which would be against everyone's interests.

 

Another important reason for my argument for suspending the "express train" for a while is that the A-share market in the mainland is ridden with bubbles.

 

Share prices have soared to such a level they are way beyond the average of the Hong Kong market. The price difference between the A and H share is a major reason driving mainlanders to put their money in Hong Kong.

 

It is needless to say how wrong their decision could be if they invest for a profit which could evaporate as soon as the bubbles on the A-share market start to burst.

 

Therefore, the conditions are far from mature in the short term for starting the "express train" to take individual investors from the mainland to the SAR.

 

The author is a researcher with the Institute of Finance and Banking under Chinese Academy of Social Sciences

 

(China Daily October 12, 2007)