An analysis of how the Shanghai Hong Kong Stock Connect is actually not a blessing for #HongKong, as claimed by Chinese propaganda. The following article, published in Passion Times, dispels the myth that the temporary freeze on the rolling out of the Connect was a gesture of punishment for the #OccupyHK Movement. After much brouhaha since the announcement of its launch early this year, the Shanghai Hong Kong Stock Connect will finally launch next Monday (Nov 17). Pro-Beijing politicians and businesspeople alike are particularly excited about this so-called mutually beneficial arrangement. In reality, the mechanism to link the two cities stock exchanges is a tool used by the Chinese government to further internationalize its RMB currency. Under the new arrangement, qualified investors in Shanghai and Hong Kong can trade stocks in the other city freely, with an aggregate annual cap of 550 billion yuan (purchase of stocks by Hong Kong investors in Shanghai capped at 300 billion yuan annually; purchase of stocks by Mainland investors in Hong Kong capped at 250 billion yuan annually). Based on the trading ceiling, one can tell that the Connect is set out to attract investors to purchase stocks listed on the Shanghai board. In the beginning, investors in Hong Kong can purchase RMB-denominated A-shares as well as H-shares that are simultaneously listed on the Hong Kong Stock Exchange. Northword-bound trade (purchase of Shanghai stocks) are denominated and settled in RMB, so this would lead to an increase in demand for the Chinese currency by overseas investors. In other words, within the framework of the strict currency control by the Chinese Central Government, this mechanism will stimulate the overseas demand for RMB. Just by looking at the difference in the amount of transactions allowed in each market, one can tell that the Connect exists to serve the RMB market. In the past, China relied on cheap labor and abundance resources to build it competitive advantage in the world. It relentlessly expanded its industrial output and exports to earn foreign currencies--this is so-called course-style economics. However, due to the ever-rising wages, a large number of foreign-owned businesses are moving their production lines to Southeast Asian countries or even back to their home countries. In addition, after the Financial Tsunami of 2008, European and U.S. economies were dealt with a harsh blow. As a result of the reduction in exports, Chinas foreign currency earnings have continued to drop. The effects of the course-style economics have started to dwindle. At this time, it is crucial for China to seek other ways to boost consumption by raising domestic demand for goods among the middle class. One way was to expand infrastructural development. Since the Financial Tsunami, China has rolled out 400 trillion yuans infrastructural development projects. However, there is evidence that such projects as high-speed railway, highways and airports have not brought concrete results in boosting the economy. Besides, due to the extremely poor quality of consumer goods made in China, the idea of increasing domestic demand for Chinese goods has failed. Another way to boost the economy is desperately needed, and that is to develop the capital market by attracting foreign investors to purchase RMB-denominated stocks, bonds, mutual funds and more. This is to increase investors demand for RMB itself. China has tried numerous ways to achieve this goal, including off-shore RMB settlement markets and free-trade zones within China, but the results are lackluster. RMB still has not become an international currency, and the Chinese stock markets have not been able to become a trading center for international capital. The risk of China totally opening its capital market at this point is too large, as there is not enough support for RMB. Once open, the market runs the risk of a sudden collapse. Thats why the Chinese government has come up with a method, which is to roll out a third-party mechanism to promote the buying and selling of RMB within the framework of the RMB currency flow restrictions. And that method turned out to be Shanghai Hong Kong Stock Connect. The launch of the Connect is proof that China needs the Hong Kong Stock Exchange in order to attract investors to buy RMB-denominated financial products. The HKSE has a full-fledged and well-developed system that is on par with all the developed nations in the world. With many years of experience, it has gained worldwide reputation. Therefore, taking advantage of the HKSE is the first thing calculated by Communist China. It wanted to internationalize Chinas capital market with the lowest amount of risk. This goes to show that all that the government had done in the past, such as the Shanghai Free-Trade Zone and the Shenzhen Qianhai Free-Trade Zone have failed. Without a legally sound capital market, there is nothing China can do to achieve its ultimate goal. From the political point of view, China has turned this self-beneficial scheme into a blessing for Hong Kong. Years ago it introduced CEPA to absorb elites from the Hong Kong service industry, and now, it is introducing the Connect to take advantage of the Hong Kong capital market. During the 40+ days of the Occupy Movement in Hong Kong, the Chinese government has at one point tried to delay the launch of the Connect to create an illusion that China was penalizing Hong Kong for being disobedient. Unfortunately, the Chinese Government cannot resist rolling it out next Monday. It is clear as mud now as to Who actually needs who and who cant wait anymore. To go further in analysis, trading in the financial market requires a stable environment in society. If Communist Hong Kong (those under the tutelage of CY Leung) fulfills its promise to deploy riot police to clear the protest sites, then Hong Kongs international reputation and trustworthiness will go down the train once and for all, forcing all investors from developed nations to divest from Hong Kong. Worse still, foreign nations might impose trade sanctions on the city to condemn its violent acts. Whether its just one bullet or one round of tear gas, the consequences are unimaginable--this could take away the last chance for Communist China. This means that China needs Hong Kong more than the other way round. This isnt any blessing at all. The big drama surrounding Shanghai Hong Kong Stock Connect is a solid proof that China depends on Hong Kong. Therefore, we must learn to strike at this vital part! Source: Passion Times passiontimes.hk/article/11-10-2014/19590
Posted on: Mon, 10 Nov 2014 15:47:21 +0000
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