Bridging Hong Kong, Shanghai for the future

This way, Hong Kong will become the global securities trading center and a center for offshore renminbi trading and investment.

To be fair, allowing Chinese domestic investors to access the Hong Kong stock market may prove to be even more valuable. Given the controls on capital accounts and cross-country listings, Chinese domestic investors are severely underdiversified in their portfolios.

Li talks of linking Shanghai, Hong Kong exchanges

Cabinet calls for new share listing system

Such underdiversification costs Chinese investors dearly, especially given the exorbitantly high volatility and recent disappointing performance in the Chinese A-share market.

By investing in the Hong Kong market, Chinese investors can not only buy cheaper stocks offered by the same company (for most companies cross-listed between Shanghai and Hong Kong, the H-shares trade at a discount), but also invest in overseas companies that cater to Asian investors and are listed in Hong Kong.

With the direct investment channel between Hong Kong and Shanghai, Chinese investors can use their existing accounts to invest in overseas companies. Such convenience and familiarity will no doubt boost Chinese investors' confidence in investing overseas, which not only helps their portfolio performance but also propels more Chinese capital into the international financial arena.

Companies listed in Shanghai also have reasons to feel encouraged. Although not a bottleneck on the market, additional inflow of international funds will not hamper companies' stock performance. More important, the increment of international investors investing through their Hong Kong accounts can probably bring a shift in the minds of listed companies' management.

Long-term, value-driven international investors may bring incentives to companies that have a long term commitment to becoming better companies and rewarding their investors, and instill better discipline in companies with poor corporate governance and investor responsibility.

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