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China Takes another Step toward Capital Freedom

November 25, 2014 in Economics

By James A. Dorn

James A. Dorn

The launch of the Shanghai-Hong Kong Stock Connect takes China a step closer to capital freedom. Before the new trading link, officially known as the Mutual Market Access (MMA) program, investment opportunities for foreign investors have been limited to a select group of fund managers. Now all foreign investors can directly buy shares listed in Shanghai via the Hong Kong Stock Exchange. Likewise, capital is now freer to move southward into Hong Kong.

By giving global investors a wider choice of mainland stocks, President Xi Jinping hopes to pave the way for rebalancing China’s lopsided economy. Injecting new capital into consumption-oriented firms will help grow the nonstate sector and improve the allocation of resources. Meanwhile, by allowing Chinese investors direct access to the Hong Kong exchange, the MMA will help diversify portfolios, mitigate risk and increase pressure for even greater capital freedom.

The new property rights structure, however, is limited by quotas placed on daily trading volumes. Foreign investors have the right to buy stocks of 568 firms listed on the Shanghai Stock Exchange but are subject to a daily quota of US$ 2.1 billion on a net basis — that is, on the difference between the value of shares bought minus shares sold. The daily quota for investment in Hong Kong is US$ 1.7 billion.

The linking of the Hong Kong and Shanghai stock markets marks progress, but real liberalization can only come if the mainland ensures property rights under the rule of law.”

One significant restriction of the MMA program is that offshore investors in the Shanghai market must enter buy/sell orders before the market opening, which limits rapid responses to new information. Unless trading can take place continuously, capital markets will be less robust.

Hong Kong, as the freest economy in the world, is an ideal place for global capital to enter the mainland. With the further opening of China’s capital account, Shanghai could one day outshine Hong Kong, but only if property rights are protected under the rule of law understood as a meta-legal principle whereby all individuals are guided by what F. A Hayek called “rules of just conduct.”

A system that limits the power of the state and enhances individual freedom under the law is one in which no one is above the law. Individuals are free to choose provided they do not infringe on the equal rights of others. That system has …read more

Source: OP-EDS

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