Stock Connect to make bourses healthy

Finally, Stock Connect should increase the attractiveness of holding renminbi overseas, forming a key support for China's internationalization of the currency. One thing that has held back the growth in renminbi assets overseas has been the lack of investment options, as renminbi holders overseas are limited to investing through RQFII funds or the dim sum bond market. Opening up the mainland market to foreign holders of renminbi will boost attractiveness of renminbi overseas, which is important for the long-term policy goals of opening up the capital account and eventually seeing the renminbi become a reserve currency.

While Stock Connect clearly supports many policy goals, there are some who doubt it will succeed.

In terms of flows of investment from Shanghai to Hong Kong, domestic investors are wary of investing in a market they do not understand. A survey by the brokerage and investment group CLSA Ltd in August showed that 77 percent of mainland investors would not take part in the scheme. Hong Kong shares are, on average, more expensive than their domestic counterparts, while many Chinese institutional investors that have experience investing overseas have lost money.

Meanwhile, there are two big issues that may discourage foreign institutional investors from investing in mainland shares.

First, under the original regulatory guidelines, investors who plan to sell shares must transfer them to a broker one day before they plan to sell. There are concerns that information could leak and other market participants could sell ahead of them, driving down the share price.

Second, a 10 percent capital gains tax may be applied to mainland investments through Stock Connect that is not now applied to investments in Hong Kong. If this is done, investing in Hong Kong shares may be a more convenient way for international investors to get exposure to China.

While these concerns are valid, authorities appear to be aware of the problems and are willing to address them. For example, Hong Kong Exchanges CEO Charles Li has said that investors would be allowed to transfer shares to a broker by 7:30 am. If they wanted to sell those shares that day, shortening the time gap between the transfer of shares and actual sale.

Meanwhile, the Hong Kong exchange has reportedly asked mainland's tax authorities to give investors time to adjust to tax rules, which would make investment more attractive. Furthermore, foreign investors may find it hard to avoid the fact that mainland stocks trade at a 5 percent discount to their equivalents in Hong Kong.

The author is head of the China office of London-based China economics research company NSBO. The views do not necessarily reflect those of China Daily.