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Any attempt to link the two markets will have to be initiated by the authorities on the mainland and in Hong Kong. This is because it would touch on the issues of currency convertibility, especially in the capital account, and restrictions imposed by the mainland on the mobility of users and providers of financial services, and of capital and financial instruments between the two jurisdictions.

Despite these hurdles, it is feasible to link the financial infrastructures of the two systems, including payment, settlement, clearing and custodian mechanisms by a channel with a high degree of controllability. There have been a number of suggestions on how such a channel could be built.

One recommendation from Yam is to synchronize, in the approval process, the Qualified Foreign Institutional Investor and the Qualified Domestic Institutional Investor schemes to bring about a zero net inflow and outflow of funds, or, if necessary, to allow a net flow in either direction to achieve a better balance of international payments.

Another method that has been widely discussed is to create derivative instruments, such as certificates of ownership of shares listed on the Shanghai, Shenzhen and Hong Kong stock exchanges. They would be traded in the two markets with an arbitrage mechanism to equalize prices.

Designing an effective channel to link the mainland and Hong Kong markets would invariably involve a host of policy issues. But the advantage of having a big, active and efficient capital market must seem obvious to economic planners on the mainland and in Hong Kong.

E-mail: jamesleung@chinadaily.com.cn

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