State secrecy fears overshadow Stock Connect debate

Market players question whether differences in transparency and legal systems will undermine the pending trading link between Hong Kong and Shanghai.
State secrecy fears overshadow Stock Connect debate

Market participants have voiced concern over the future efficiency of cross-border regulatory collaboration between Hong Kong and Shanghai as regards the pending Stock Connect trading link.

On the sidelines of the fifth Pan Asian Regulatory Summit in Hong Kong this week, industry professionals questioned whether the China Securities Regulatory Commission (CSRC) would be forthcoming on sharing sensitive information.

The CSRC and Hong Kong’s Securities and Futures Commission (SFC) signed a memorandum of understanding (MoU) for Stock Connect on October 17 covering not only cooperation in investigative matters, but also enforcement.

But market players told AsianInvestor they doubted whether the CSRC would be transparent enough to commit to the same standards of enforcement as the SFC.

“I think what’s missing [with the CSRC] is transparency,” said one consultant attending the forum at the JW Marriot Hotel in Hong Kong. “In the US, UK, Canadian and Australian markets any offence is published, whereas in China you don’t know?

“Only when China becomes transparent can you start to see if it’s applying the rules consistently. The principles of transparency, consistency and the determination of consequences exist in a lot of other markets, but with China you just don’t know.”

One question concerned China’s state secrecy law, in reference to a legal case dating back to 2012 in which auditor EY cited the law as grounds for refusing to disclose sensitive information to the SFC on its mainland client Standard Water, which was seeking to list in Hong Kong.

After a drawn-out two-year legal process, in June this year Hong Kong’s High Court ordered EY to turn in the audit papers. EY has since appealed against that court order.

On the issue of state secrecy, Frank Zhang, CEO of ChinaAMC in Hong Kong, noted: “Information sharing is one of the most critical issues for the [Stock Connect] cooperation. You have to have mutual trust between the two regulators, the two stock exchanges and in the design of this cross-border procedure.”

Mark Steward, executive director in the SFC’s enforcement division, sought to downplay fears at the forum that differences in the legal systems of Hong Kong and mainland China would impact Stock Connect collaboration.

He suggested the bilateral MoU signed between the two sides set a benchmark for cooperation internationally precisely because it covered both investigative cooperation and enforcement.

“Our commitment to the CSRC is that we will help them to investigate and enforce breaches of their rules, as they will help us to investigate and enforce breaches of our rules,” said Steward. “It is that binary commitment that ‘we will do it for you and you will do it for us’. That mutual dependence is the cornerstone of this MoU.”

It’s anticipated that once Stock Connect goes live, expected imminently but delayed from its widely advertised October schedule, mainland investors will be required to comply with Hong Kong law when trading directly in H-shares, while investors going through Hong Kong will be subject to onshore China rules when trading Shanghai stocks.

Steward conceded that legal systems were radically different between the two sides, saying that even attempting to try for total synchrony would be “absurd”. But he argued that was the beauty of the MoU, saying it went further than basic cross-border cooperation.

He contrasted the bilateral agreement to the multilateral MoU signed in 2002 by more than 100 regulators committing to exchange information on securities transactions when there were suspicions of foul play.

Steward highlighted inconsistencies between the many jurisdictions, noting that what might constitute criminal proceedings in one might be treated as a civil case in another. He stressed that the Shanghai-Hong Kong accord committed both sides to the same cross-border enforcement action, avoiding such issues.

He noted, too, that a bilateral agreement including cross-border enforcement had been in place between Hong Kong and mainland China since 2007. While requests for information had only been one-way so far – from the SFC seeking CSRC help on investigative matters – he said he expected much more of a two-way flow of requests for Stock Connect.

EY declined to comment for this article.

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