Hong Kong in­vestors are un­der sur­veil­lance – that's good

The Star Malaysia - StarBiz - - Foreign News - By NISHA GOPALAN

MA­NIP­U­LAT­ING Chi­nese stocks from Hong Kong is about to get harder. That's the good news, for in­vestors in­ter­ested in fair and trans­par­ent mar­kets.

The bad news is that it raises the spec­tre of in­creased Chi­nese sur­veil­lance of in­vestors in the city.

By the mid­dle of next year, buy­ers of eq­ui­ties via the Hong Kong ex­change's trad­ing links with the main­land will have to dis­close who they are through an in­vestor ID sys­tem, ac­cord­ing to the head of the city's Se­cu­ri­ties and Fu­tures Com­mis­sion.

The re­quire­ment is more in­va­sive than cur­rent global norms that deny reg­u­la­tors di­rect ac­cess to that in­for­ma­tion, forc­ing them to re­quest it from the bro­ker­age through which a trade is per­formed. (The MiFID II reg­u­la­tions that come into force early next year will see the in­tro­duc­tion of an iden­ti­fi­ca­tion sys­tem in Europe.)

Un­til now, any in­vestor in Chi­nese shares want­ing to cloak their iden­tity could route trades through Hong Kong us­ing the so-called con­nect pro­grammes set up with Shanghai in Novem­ber 2014 and Shen­zhen last De­cem­ber. Such anonymity isn't pos­si­ble in the main­land, which in­tro­duced strict ID re­quire­ments af­ter a spate of scan­dals in the early 2000s when many bro­kers were ac­cused of steal­ing stocks. All traders need an ID reg­is­tered with the stock ex­changes and clear­ing house; the sys­tem gives reg­u­la­tors ac­cess to other in­for­ma­tion be­sides iden­tity, in­clud­ing how much cash in­vestors have in their ac­counts.

In­vestors con­cerned about their in­for­ma­tion be­ing passed on to Chi­nese au­thor­i­ties can be as­sured that the SFC held back from adopt­ing a main­land-style ap­proach. Hong Kong's ID sys­tem will drill down only to the level of the trader, rather than the ul­ti­mate in­di­vid­ual owner. Buy­ing through a fund, for ex­am­ple, will con­tinue to as­sure some anonymity.

Most fund man­agers are re­lieved that the ID re­quire­ment won't go deeper, ac­cord­ing to Eu­ge­nie Shen, head of the as­set man­age­ment group at the Asia Se­cu­ri­ties In­dus­try and Fi­nan­cial Mar­kets As­so­ci­a­tion. “The op­er­a­tional and ad­min­is­tra­tive bur­den of op­er­at­ing an ID sys­tem down to the ul­ti­mate ben­e­fi­cial owner level would be very high,” Shen said.

Hedge funds and other pro­fes­sion­als might fret that a full-dis­clo­sure sys­tem would open them to the risk of in­for­ma­tion leak­age that would tip off other in­vestors on their trad­ing strate­gies. In truth, though, the ID move is pri­mar­ily aimed at Chi­nese in­vestors who are us­ing Hong Kong as a con­ve­nient plat­form to play the mar­kets back home.

A case in point: In March, the Chi­nese Se­cu­ri­ties Reg­u­la­tory Com­mis­sion fined Tang Hanbo the equiv­a­lent of about US$170mil in two cases of mar­ket ma­nip­u­la­tion, one of which was the first to in­volve trad­ing through the stock con­nect be­tween the main­land and Hong Kong. Tang, who had been pun­ished for il­le­gal trad­ing at least twice be­fore, used the link to ma­nip­u­late the Shanghai-listed shares of Zhe­jiang China Com­modi­ties City Group Co. At some point, the ID sys­tem will be ex­tended to main­land in­vestors trad­ing Hong Kong stocks, SFC Chief Ex­ec­u­tive Of­fi­cer Ash­ley Alder said this week. That could help com­bat ma­nip­u­la­tion of the city's stocks, a ris­ing prob­lem that is wor­ry­ing the se­cu­ri­ties reg­u­la­tor.

More money has flowed into Hong Kong than in the other di­rec­tion via the con­nect pro­grammes this year – 520 bil­lion yuan (US$79bil) ver­sus 315 bil­lion yuan into Shanghai and Shen­zhen stocks, ac­cord­ing to Alder.

While pri­vacy will re­main a con­cern for for­eign in­vestors, Hong Kong looks to have struck a rea­son­able balance. With MiFid II, there is a global trend to­ward more trans­parency in mar­kets. Bet­ter for Hong Kong and China to be tak­ing such ac­tion at a time when bil­lions of dol­lars of for­eign in­vest­ment are flow­ing in than dur­ing a drought.

If iden­tity dis­clo­sure helps to cre­ate fairer and more trust­wor­thy mar­kets, then it will be a price worth pay­ing. There's no free lunch.

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