Ashley Alder, CEO of the Hong Kong Securities & Futures Commission (SFC), says the Stock Connect initiative has had a positive knock-on effect on relations with its Chinese counterpart – especially around enforcement and investigation.
Ashley Alder, SFC
The regulator’s head says Stock Connect has proved to be “a really significant change, because it changes the balance of incentives to cooperate across borders”.
The Shanghai-Hong Kong Stock Connect was launched in 2014 to allow investors mutual stock market access using their local brokerage channels and clearing houses.
Alder is also chairman of the International Organization of Securities Commissions (IOSCO). Answering a question from the floor from Euromoney at the opening of IOSCO’s new regional hub in Kuala Lumpur, he says that although IOSCO members agree to assist one another in terms of enforcement cooperation across borders, in practice imbalances have historically made that cooperation challenging with mainland China.
“The reality in Hong Kong and China is that for many years the major interaction between global capital and mainland China was centred on the listing of mainland businesses in the Hong Kong market,” he says.
“The experience around regulatory cooperation of the type with which we’re familiar in IOSCO, so far as the SFC and CSRC [China Securities Regulatory Commission] are concerned, has developed over time – and it had to.”
Alder adds: “If you think about it, in an era where the major connection was around those listed companies and international capital, the degree to which CSRC would be on the receiving end for requests for investigatory assistance, compared to its need for regulatory assistance, would be completely unbalanced.
“They would get lots of requests, and they would require none from anybody else for the simple reason that international companies were not, and are still not, listed in mainland China.”
It can never be perfect. After all, you have two different legal systems, two jurisdictions, and there isn’t extradition between Hong Kong and China. That’s a fact of life. But…- Ashley Alder, SFC
That imbalance has been consistently problematic. Jurisdictions in which Chinese companies are listed have found themselves facing an uphill struggle should one of those listed companies run into trouble, as the backer of the listed company is on the mainland and to all intents and purposes untouchable.
Hong Kong isn’t the only place to have discovered this – several so-called S-Chips have gone under in Singapore, with investors getting nothing back and having no idea how to chase down the misbehaviour of the deals’ mainland backers – but it is a particularly key issue in Hong Kong, given the proportion of the exchange that is linked to the mainland.
The SFC has teeth within Hong Kong, and is becoming fiercer by the day in terms of enforcement, but historically has had little leverage across the border.
“With the introduction of Stock Connect, there is a really significant change,” Alders says.
Stock Connect allows secondary trading in the Hong Kong and Chinese markets in a sort of closed loop, whereby mainland investors can invest in Hong Kong securities, and Hong Kong investors in the Shanghai and Shenzhen bourses.
“Although it is a relatively small amount of trading – though it has got to close to 10% of overall turnover in Hong Kong at times – it changes the balance,” says Alders.
“To give you an example, there is a concern that mainland investors or participants could operate in Hong Kong through Hong Kong brokers in order to manipulate or insider deal in the mainland markets.
“Clearly, the CSRC would be interested in our ability to collect information to enable the CSRC and others on the mainland to take action around that. That has now happened.”
Alder says there was a case recently “where we did use our powers on the ground in Hong Kong to assist CSRC to an enforcement outcome. Once it happens, you can demonstrate that balance of incentives which leads to cooperation starting to happen on the ground.
“It can never be perfect. After all, you have two different legal systems, two jurisdictions, and there isn’t extradition between Hong Kong and China. That’s a fact of life.”
He adds: “But to the extent we are able to use this greater market connectivity to establish greater cooperation between the CSRC and ourselves based on equality of incentives, that’s the way we’re going. I personally am quite optimistic.”
Alder points out that two doors down from his office is the head of mainland affairs, who was previously the director general of CSRC. “That is incredibly important,” he says. “It’s all about people.”