Cross Border Trading - Fortune or Curse

 HK/Shanghai Exchange Linked Cross Border Trading ELT

Only on Thursday have we heard the announcement of this ELT, HSI shot up right away but enthusiasm cool on Friday, why?

First of all, that is a short squeeze, timed with the announcement to make it more believable and short punters have no time to listen to others of their viewpoints of the scheme and many are frighten to close their positions.

Many fans of China opening up further on the financial front hurray this is a step in the right direction, but is it?

If you looked at the limits of Cross Border trading, it is not really opening up, it merely wants to attract further capital into China as the HK->Shanghai limit is 300b while the other way is 250b. Don't stop here, there is also a daily limit of about 13b vs 10.5b. That is to say if there is a crash, there is limit down ie once the limit is reached, you have to wait till tomorrow to sell. It will be a full 23 days before you can unload the full limit or load up the full limit.

If China is confident about her financial being, since her exchange reserves are way too high, it should allow the invest HK limit to be much bigger than the invest Shanghai limit.

How trustworthy are the financial accounts of listed companies in Shanghai and their shares in HK? No one really knows, but there is the belief that the Chinese knows better than the outside world and this is one reason for the low level of investors interest in China of A shares.

Many A/H shares have very high A share prices, but the China banking shares in HK are higher than those in China, while HSI is heavily weighted towards China Shares these days, we likely would see a southern drifting of the Shanghai market [sell those highly priced A share and buy H share in HK] and a lower HSI because China banking shares in HK will drift lower too.

There is a wait period of six months to realize the scheme and we still haven't heard the details of how to trade aside from the limits and details of qualified investors in China, there should be no comparative qualification of investors in HK.

Once all the full details are out, the markets would have adjusted to more normalized levels ie only a 2-3% difference between A/H shares that are traded on both markets.

Yet this is on the assumption that investors from China still wants to own those China shares, who knows, they might choose to avoid China heavy shares altogether.