A proposal mooted recently suggests that mainland China and Hong Kong should establish a joint trading mechanism for trading the shares of companies listed in both markets. Experts are of the view that this step would help curbing stock-market bubbles in China and to modernize its financial system. The mooted arrangements if comes into force, it will allow investors in Shanghai and Hong Kong to trade shares of 38 companies with dual listing, in both markets.
However, this idea as of now has the status of a mere proposal, but if it is brought into shape to be implemented it would represent a path breaking efforts in linking Chinese financial system with Hong Kong and to the world financial markets. At present, these to markets are functioning largely independently.
If this kind of mechanism has been put into practice would mean share prices in Shanghai would represent global as well as domestic investor sentiments. As a matter of fact, China can use Hong Kong’s much advanced financial market as an instrument to modernize the complete Chinese financial system.
The two markets would need special custodian mechanism to allow investors to open trading account in both the markets. Since China still has controls on capital flows and domestic fund moving abroad it would be slightly difficult to absorb this aspect into the mechanism. However, there is existing mechanism for foreign investors to buy mainland shares and it could be used to operate the trading on both stock markets.
