Hu-Gang Tong is a win-win program that bridges two drastically different markets. It can provide lessons to reform in other areas, and therein lies its strategic significance.
A successful Hu-Gang Tong will reinforce the central government’s determination and confidence in further opening up the financial sector.
Before the program was launched, many people had misgivings about opening the capital market to foreigners. Now it is apparent that an open market will not bring floods and beasts.
The program has also proved once again that opening up benefits China. It enabled global investors to focus on the country. News about its preparation prompted investors to reevaluate the share price of blue chip stocks on the A-share market, and its launch in November fueled a rally again. In a sense, the Hu-Gang Tong is the capital market equivalent of China’s accession to the WTO.
It also proved that opening up can be mutually beneficial. Hong Kong, in fact, is the biggest beneficiary of the program. The linkage has bound the Hong Kong market close to the mainland’s economy, enhanced its position in the global financial system and enabled it to claim superiority over regions that are also vying to be a financial hub in Asia, including Tokyo, Seoul and Singapore.
The strategic significance of Hu-Gang Tong also has to do with the lessons it can offer to future reforms. It is much more than a connection between the Shanghai and Hong Kong stock exchanges. It is a connection between China and the rest of the world, one that allows a market with unique local characteristics and one that is completely open and conforms to international standards to come together. The divergence between the two is obvious and bridging the gap is something that had never been tried before. This is also why, before the program was launched, there were some twists and turns in negotiations, many regarding technical details and others about regulation. But because both sides have held the right judgment about the future, they were able to overcome all the difficulties and reach an agreement.
The program can serve as a reference to connections between other markets with similar conditions. It is also an example of success on the road to gradually opening up the capital market with a currency that is not fully convertible. It can offer valuable experience in terms of respecting local rules, minimizing institutional cost and taking reforms one step at a time.
Moreover, the influence of Hu-Gang Tong will reach beyond the A-share market and China’s economy to all of Southeast Asia and even the global financial system.
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