Beijing backs down over Hong Kong shares plan By Tom Mitchell in Hong Kong and Richard McGregor in Beijing
Tuesday, November 06, 2007
The technocrats at China's State Administration of Foreign Exchange (Safe) are not in the habit of stirring the country's capital markets.
Yet that is what they managed to do on August 20, when announcing a unexpected “through train” pilot project that seemed to allow all Chinese residents to invest in Hong Kong's stock market for the first time, via the Bank of China's operations in Tianjin, a coastal city near Beijing.
The prospect of a “great wall” of money flooding into the territory cheered Hong Kong and international investors. By the end of August the benchmark Hang Seng Index soared 11 per cent to 24,000. Two months later, it cracked the 30,000-point barrier.
It now appears that Hong Kong and international investors hoping to surf the wave will have to wait indefinitely for a scheme that might be much more modest than originally anticipated.
In his first public comments on the matter, Wen Jiabao, China's premier, spoke this weekend of the need for “scientific judgment and analysis” before forging ahead. His call for consultations with all relevant Chinese and Hong Kong regulatory officials also hinted at the bureaucratic tangle that has resulted from Safe's half-baked announcement.
Nobody was more surprised by Safe's August gambit than the Hong Kong government, even though it had been lobbying for just such a breakthrough at the highest levels since late last year.
Two senior Hong Kong government officials, who asked not to be identified, told the Financial Times they were not warned in advance of Safe's announcement. Moreover, the reform differed from what Hong Kong had requested.
In January, a Hong Kong government advisory committee outlined the territory's wish-list in an “action agenda” report on financial sector development.
“The Focus Group is not in a position, and is not attempting, to prescribe the appropriate responses to [China's financial reform] challenges,” the committee said.“But it does seem that one possible response . . . may be to implement bold but careful steps in capital account liberalisation, giving priority to . . . outward portfolio investments by [Chinese] residents.”
The committee went on to suggest a so-called “free-walk” scheme, whereby “high net worth mainland individuals with assets of over, say, Rmb1m ($134,000)” would be able to remit their foreign exchange holdings to Hong Kong for investment in a variety of overseas vehicles. In theory, such a scheme could be managed by Safe alone, provided it first secured the blessing of China's State Council.
According to one of the two senior Hong Kong government officials, the problem with Safe's surprise “one bank [BoC], one city [Tianjin], one market [Hong Kong]” announcement was the regulatory can of worms it opened.
By designating just one bank as the conduit, Safe gave China's banking regulator an opportunity to get involved. The selection of one city injected Chinese regional politics into a delicate situation. And most problematically, directing the programme's assets to Hong Kong shares irked the Shanghai-centric China Securities Regulatory Commission (CSRC) and its boss, Shang Fulin.
Mr Shang has nowhere near the same rapport with his Hong Kong counterparts as does Zhou Xiaochuan, China's central bank governor with ultimate authority over Safe.
“The CSRC is so difficult and obviously they didn't like that,” the Hong Kong government official said. “Zhou Xiaochuan is reform-minded. That's why I'd be worried if he were to disappear from [the central bank] and was replaced by Shang Fulin. That would be awful.”
Politics aside, by limiting the scheme's investment outlet to Hong Kong stocks – as opposed to the more open-ended approach favoured by the territory's “free-walk” advocates – Safe has stoked bubble conditions.
According to the Hong Kong government official, Beijing is concerned that “mainland investors would be taken to the cleaners by gwailo [foreigner] investors who have already brought up the market”.
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