A MOVE to allow investors of the Hong Kong and Shanghai stock exchanges to trade in each other’s equity markets has a real chance of success thanks to the yuan’s increasing global role, and throws a lifeline to stock exchanges and brokerages in the two cities.

    Mainland and Hong Kong regulators surprised market participants Thursday by unveiling a cross-market stock investment program, banking on the success of the promotion of the internationalization of the yuan since 2010.

    The initiative, known as the Shanghai-Hong Kong Stock Connect, is the latest in a series of financial sector reforms that regulators have taken this year, such as widening the yuan’s trading band and increasing quotas for investors.

    “Preparation this time is sufficient and the market condition is mature, which will likely lead to a success of the program unlike the last time,” said Ben Zhang, managing director at Haitong International, an asset management company in Hong Kong.

    “This program is also in line with the whole yuan internationalization process,” Zhang said.

    China said it would allow cross-market stock investment between Shanghai and Hong Kong limited to an overall quota of 550 billion yuan (US$88 billion) and the preparation would take about six months.

    Investors are far more optimistic about the success of the program this time around after a failed attempt in 2007, when regulators had to bring down the curtain quickly on a pilot program amid concerns over frothy market valuations.

    The optimism is due to the big strides taken in seeding an offshore yuan market in Hong Kong and establishing strong infrastructure links with the mainland in recent years.

    The new plan is also far less restrictive than the current option to buy mainland equities via quotas, as the latter requires an investment track record and is only available to institutional players and requires regulatory approval.

    Under a foreign currency-denominated quota, investors can buy US$150 billion in domestic assets while under a yuan-denominated quota, they can buy 270 billion yuan worth. Both quotas are underutilized due to strict requirements.

    Conversely, for mainland investors, the new program opens up an array of investment options as they can now buy Macao-listed stocks, social-networking giant Tencent Holdings Ltd. and AIA Group Ltd., Asia’s No. 3 insurer by market value.

    The move is expected to whittle away at the spread for dual-listed stocks, with analysts expecting prices of mainland-listed A shares and Hong Kong-listed H shares to move more closely together in the near term.

    Trading activity is set to remain hectic in counters with a significant gap between these markets, with arbitrage funds sniffing at opportunities to exploit the gaps.

    The quotas are sizeable compared with daily turnover on the Hong Kong stock exchange, which has seen dwindling revenues from stock broking in recent years, and for mainland indices, which are trading at some of their lowest valuations in a decade.

    Citi analysts estimate the presence of mainland investors in Hong Kong could bump up daily turnover by more than 10 percent, representing a boost in revenues for the Hong Kong bourse.

    (SD-Agencies)