Get ready to board China's reform train

I was pleasantly surprised to hear the good news first hand from Premier Li Keqiang at Boao Forum that investors on the Chinese mainland and in Hong Kong will soon be able to trade shares on each other's stock exchanges. The announcement is beyond adding weight to the importance of the scheme; it underscores

The Shanghai-Hong Kong Stock Connect, or the "Through Train Program" (TTP), likely to be launched in six months, is a significant step toward the opening up of China's capital account.

Allowing cross-border capital flow, the program is a long-awaited, missing ingredient in the internationalization of the renminbi. Until now, the liberalization of China's currency has primarily focused on the economy's current account, especially on trade and direct investments.

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Since the country's new leadership took office last year, there has been a noticeable acceleration in the pace of reforms. The Shanghai-Hong Kong linkage is among a plethora of new measures rolled out by the government at a breathtaking pace. Over the past few months, we have seen a widening of the renminbi trading band, the end of the central bank's control over bank lending rates and the launching of Shanghai's pilot free trade zone, which has opened two-way corporate payment flow.

The program is also a move to quench the thirst of investors for Chinese assets, which have hitherto been inaccessible. Hong Kong, the leading offshore renminbi center, will soon become the choice connector bridging the two ends of a heavy dumbbell - on one side, global investors, who will gain direct access to the mainland's stock market, and, on the other, tens of millions of mainland residents keen to diversify their assets.

The TTP allows mainland investors to trade in Hong Kong shares up to a quota of 250 billion renminbi ($40.08 billion), and Hong Kong investors to trade in Shanghai-listed shares up to 300 billion renminbi. Up to now, access to the mainland's A-share market has been limited to licensed institutional investors going through the Qualified Foreign Institutional Investor and Qualified Foreign Institutional Investor quota schemes. The new program provides a more direct and flexible means for investors, including retail investors, to trade in Shanghai-listed shares without the need for going through fund managers.

Like most reforms, every change will bring about knock-on effects. As a start, the program may narrow the valuation gaps between the Shanghai and Hong Kong equity markets. The 20,000 renminbi conversion cap may become the next regulatory consideration in the mainland's pipeline. Listing in Hong Kong may present a fresh appeal to foreign issuers. And given that the scheme is denominated in renminbi, the implicit convertibility of the currency has never been clearer. These are all plausible suppositions to be borne in mind.

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