Stock Market Integration Between the Hong Kong SAR and the People's Republic of China - the Use of a Revised 'H' Share Model and Enhanced Institutional Support

Abstract

Bilateral, multilateral and regional linkages between stock exchanges generate increased sources of funds, investor return and product choice. Such associations can also lower transaction costs in both initial listing and subsequent trading, increase liquidity more generally in the secondary market and enhance investor protection and confidence in the stability and reputation of the market and the status of companies listed on the market. This thesis argues that the integration of the stock markets between The Special Administrative Region of Hong Kong ("Hong Kong") and the People's Republic of China (CTRC) is therefore a desirable objective and investigates how a more successful and substantial degree of integration could be achieved in this area. Integration, in particular, requires harmonization of laws and regulations. In 1993,H shares issued by PRC companies were first allowed to cross-list on the Hong Kong Stock Exchange. This listing was made possible by the introduction of a new set of legal and operational rules promulgated in both the PRC and Hong Kong. This thesis expounds four models of integration, the H Share Model, the System Harmonization Model, the Mixed Harmonization and Mutual Recognition Model, and the Full Harmonization Model and argues that H share regulations are an effective way to further integration despite problems inherited from the PRC's 'pre-open door' policy. In considering other potential models, the European Union and the United States capital market are also considered as potential models for further integration of the PRC and Hong Kong stock markets despite the inherent limitations of the latter model.

It is also proposed that enhanced institutional support can be used as an effective means of accelerating the integration process. Investigating both the feasibility and possible implementation of market integration within an appropriate institutional framework ensures an autonomous, legal and independent environment separate from the political realm.