China kills Hong Kong share buy plan

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A controversial and potentially groundbreaking proposal by Chinese authorities to allow mainland citizens to buy shares listed in Hong Kong has been formally scrapped.

The State Administration of Foreign Exchange, a body under the central bank which first announced the “through train” scheme in August 2007, said in a bland statement the proposal was one of 19 documents that were no longer valid because they had expired. Safe also annulled 36 documents because they had been replaced by new regulations.

The declaration by Safe, while not surprising because the plan had not moved forward, marked the official end of a plan that once gave high hopes to Hong Kong investors, sent the city’s stock market soaring and resulted in massive fund inflows.

In the three months after the proposal was floated, the Hang Seng index rose 55 per cent to 31,638 points, which still stands as the market’s all-time peak.

The plan suffered a setback in November 2007 when Wen Jiabao, the premier, in effect shelved the proposal by attaching four open-ended conditions to final approval. The plan had produced infighting between rival agencies in Beijing with conflicting interests in management of the country’s financial system and capital account.

“No one believed the through train would come. There were too many problems such as capital controls and foreign exchange. I think China prefers other means such as QDII for capital outflow,” said Timothy Fung, China equity strategist at Credit Suisse private banking.

QDII, or the qualified domestic institutional investor scheme, allows Chinese funds to invest overseas. China resumed approvals for QDII in October after a 17-month suspension. E Fund Management received a $1bn quota to invest in offshore securities and China Merchants Fund Management was granted a $500m limit. A large number of fund companies are waiting to set up their own QDII funds.

”This is yet another lesson that things in China take an extremely long time and another lesson for Hong Kong that what it thinks China needs is not necessarily what China thinks it needs,” said Fraser Howie, author of Privatising China: Inside China’s Stock Markets.

Mr Howie noted that China’s State Council on Friday approved in principle the launch of stock index futures and the trial debut of short-selling and margin trading in China. However, no details had yet been released in spite of official promises that they would be made available last week.

China had previously announced the launch of short-selling and margin trading on a trial basis 18 months ago, but that trial never started. ”People don’t have a memory when it comes to China”, said Mr Howie.

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