Weeks and months of jumping up and down in excitement reached a crescendo yesterday as many of the Big Lychee’s most important puffed-up men in suits banged a gong and launched the Shanghai-Hong Kong Stock Connect. The men in suits laughed, shook hands and clinked champagne glasses as if they were ‘going to witness history’, to quote the actual words of HK Exchanges Chairman CK Chow.
This was in line with the build-up. Mainland authorities announced the cross-border stock trading system as a major breakthrough in opening China’s capital account. Some commentators couldn’t resist suggesting it might also be a ‘gift’ from Beijing to help out poor Hong Kong; when the arrangement was delayed, they claimed it was to ‘punish’ Hong Kong for pro-democracy students’ occupation of city streets. When the scheme was back on track, it emerged that Chinese officials had been sorting out such minor last-minute details as whether the cross-border trading would be subject to Mainland capital-gains tax. And after all that, Stock Connect doesn’t open China’s capital account at all: all the money flowing up and down the system remains sealed off and must ultimately return to its own side of the border.
Like the Shanghai Free Trade Zone, Shenzhen’s Qianhai Financial Blah-blah Zone Hub, the CEPA HK-Mainland trade arrangement and dozens of cross-border Pearl River Delta Co-operation and Partnership Agreements, it’s basically baloney. China’s leaders crave the might and glory of the Renminbi replacing the US Dollar as the global currency. But the Communist dictatorship must rig exchange and interest rates to stay in power. So it’s out of the question. (Some experts would caution a developing economy like China against lifting capital controls anyway.)
The problem with all the hype and backslapping and champagne is that, apart from some credulous overseas media, we become immune to it, and more cynical. Yet another make-believe Big Breakthrough to take our minds off the fact that China’s economy is trapped by the corruption, cronyism, protectionism, bad debt and misallocation of capital that keeps the Communist Party in power. What will happen if they ever introduce a real post-Deng reform of significance and substance? The bores in suits will be grinning away as usual with their banners and gongs, while the rest of us just yawn through a chance to genuinely witness history.
So how did the Shanghai-Hong Kong Stock Connect go on its first day? Essentially the ‘wall of money’ associated with the original ‘through train’ concept years back didn’t materialize (indeed can’t, owing to a strict cap on volume). Hong Kong funds did rush northward. The South China Morning Post reports that local and international investors couldn’t resist Shanghai’s cheap railway and liquor plays. A contrarian thing, perhaps: what better time to buy, when Mainland railway bosses are getting sentenced to death or jumping from tall buildings, or when maotai sales are plummeting owing to anti-corruption drives? Some funds of questionable taste are apparently chasing Looming East Asian War-plays in the form of defence-related companies. Another explanation is that investors are switching to this new way of buying Mainland equities to avoid the capital gains tax. A tax-break like this is of course essentially a subsidy – or to put it another way, ‘desperate eagerness on someone’s part to attract traders and save face’.
As for the southbound flow of funds – well, whoops. Where were they? Even the Standard and Sing Tao, which never fail to cheerlead vacuous cross-border hype, register disappointment and clutch at flimsy excuses. While any Hongkonger can access the Shanghai market, subject to the quota, only wealthy Mainlanders can invest in the other direction. We are told they need time to learn about the Hong Kong market, and they find the high valuation of locally listed stocks a turn-off. The high valuation reflects Hong Kong’s far higher standards of corporate governance and regulatory oversight (cue indelicate thoughts of pearls before swine). Hong Kong does have its share of mom-and-pop day-traders in penny stocks and covered warrants, which serve as glaring loopholes in the city’s strict laws against gambling. But Shanghai is by many accounts pretty much a risky, fraud-ridden casino. Hong Kong must look weird to them.
One winner from any increase in volume will obviously be Hong Kong Exchanges and Clearing, which makes its billions by slicing a little bit off every trade. In this respect, the Stock Connect is just another of those Cram More Stuff Into Hong Kong schemes that our rent-seeking tycoon-bureaucrat elite see as economic development. As with the increasing flood of Mainland shoppers, the Zhuhai Bridge, Disney, additional airport runways, more malls, more churn, more turnover, more money going in and out – it’s all about intermediaries and landlords raking off a piece of the action each time, and any budding entrepreneurs or innovators should get used to being luxury retail assistants. Not the sort of history we need to witness any more of.