China’s financial reform drive has suffered another setback. A flagship scheme to link the Hong Kong and Shanghai stock exchanges has been delayed after regulators failed to approve it ahead of an expected launch on Oct. 27. The setback puts another question mark over why foreign investors would want to access China’s markets in the first place.
The idea of allowing mainland Chinese investors to buy Hong Kong stocks, and vice versa, has been around for almost a decade. Previous attempts stumbled over China’s desire to maintain strict controls over capital flows. The latest plan, unveiled by Chinese premier Li Keqiang in April, seemed to have solved that problem by stipulating that cash from selling stocks must return to its place of origin. Though initial flows will be subject to strict quotas, stockbrokers and fund managers on both sides have prepared for a boost in trading.
Possible explanations for the holdup range from the pragmatic to the political. Chinese regulators have yet to decide whether Hong Kong-based investors would be liable for capital gains tax on mainland shares. Recent volatility may be a factor: the authorities don’t want to launch the scheme into a falling market. The stoppage could even be retribution for Hong Kong’s pro-democracy protests, which have dragged on for a month.
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