China derails proposals to allow access to shares in Hong Kong By Richard McGregor in Beijing and Tom Mitchell in Hong Kong
Monday, November 05, 2007
China has in effect frozen a proposal to allow mainland citizens to buy shares in Hong Kong, a decision that threatens to undercut the recent surge in the former colony's equities market to record highs.
Wen Jiabao, the premier, has attached four conditions to final approval for the scheme, all of which are so open-ended that Beijing could take months, if not longer, to permit it to go ahead.
“[We]should make scientific judgment and analysis on what impact the massive funds flooding into Hong Kong's financial market would have,” Mr Wen said in a highly unusual intervention delivered to Hong Kong reporters during a visit to Uzbekistan.
His comments cap two months of messy policy infighting over the proposal between rival agencies in Beijing with conflicting interests in management of the country's financial system and capital account.
The “through-train” to the Hong Kong stock market was announced in August by the State Administration of Foreign Exchange, a body under the central bank, and sparked an immediate spike in the territory's share prices.
Safe's loosely worded announcement appeared to enable anyone in China to open an account with the Bank of China to buy stocks in Hong Kong, as long as the trades were channelled through the bank's branch in Tianjin, the northern port city.
That came as a surprise to officials in Hong Kong, who had been lobbying for Chinese investors to be allowed to invest in a wide variety of overseas assets, making the territory as much a conduit as a destination.
A Hong Kong official said: “Our proposal was for Chinese [residents] with foreign exchange to be able to invest in all assets through Hong Kong. Instead it became one bank, one city, one market.”
Safe's proposal also amounted to a huge policy reform in Beijing – in effect a de facto opening of the closed capital account – and angered a host of other regulatory agencies.
The securities and banking regulators said they had not been properly consulted and that the implications had not been thoroughly thought through.
The stock and bank regulators fear that billions of dollars in funds would flee both the local share market and lending institutions to take advantage of a rare chance for cash-rich Chinese to invest legally offshore.
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