The much talked about rivalry between the Hong Kong and Shanghai stock exchanges is making less and less sense. The latest discussions on the subject focus on the expectation that the size, as defined by total capitalization, of the Shanghai stock market will soon exceed that of Hong Kong. Some prominent commentators have cited this projected development as yet another indication of the progressive decline of Hong Kong's importance as an international financial center for the mainland.

This argument fails to take into consideration that the two exchanges serve different sets of investors, with no mechanism to facilitate the cross market flow of funds. For that reason, the gains made by one market do not necessarily lead to losses by the other market.

The projected expansion of the Shanghai stock market is widely expected to be driven, at least in part, by the increase in the listings of mainland companies registered outside the mainland, particularly in Hong Kong. These companies now want to list in Shanghai because they are keen to tap the huge flow of funds into the market from mainland investors. Double listings by these mainland companies will not have the effect of channeling funds from one market to another because of the mainland's restrictions on capital flow.

Many stock market analysts in Hong Kong have predicted a drop in the amount of capital raised through initial public offerings, or IPOs, on the local exchange by mainland companies in coming years. This is not necessarily a reflection on the declining importance of Hong Kong as a source of capital to mainland enterprises.

The fact is that nearly all the major mainland enterprises are already listed in Hong Kong. It can be expected that the size of future IPOs, coming from the relatively smaller enterprises, mainly in the private sector, will not be as massive as those floated in the past by the State-owned behemoths.

In a matured economy like Hong Kong, its opinion leaders should have outgrown adolescent anxieties over relative size. What's the point of hammering the fact that the daily average turnover of Singapore's foreign exchange market has overtaken that of Hong Kong? Need Hong Kong people sulk when their city's gross domestic product has fallen behind that of neighboring Guangdong Province with a population nearly 10 times larger?

The answer to these questions is no. Hong Kong's primary concern is to preserve and enhance its free market environment in which private enterprises from around the world can thrive. But because the market is imperfect, it is necessary for the government to introduce regulations and improve the supervisory mechanism to ensure transparency and a level playing field for all.

The stock market reform that greatly tightened disclosure requirements by publicly listed companies was a welcome move. It brought the regulatory structure more in line with the highest international standards. Such provisions help attract the flow of long-term investment funds into the Hong Kong market by raising the confidence of institutional investors from around the world. This will, in turn, strengthen Hong Kong's position as a primary source of stable, long-term capital for mainland enterprises.

High on the legislative agenda is a proposed law to protect small businesses and new market entrants against unfair competition. Such a law, if property framed and vigorously enforced, would greatly enhance Hong Kong's attractiveness to mainland enterprises as a potential market as well as a springboard for overseas expansion.

Hong Kong should also concentrate on leveraging its well established international connections to expand and bring innovations to its financial and trade service industries.

E-mail: Jamesleung@chinadaily.com.cn

(China Daily 04/10/2007 page10)