Regulatory Competition and Cooperation between Securities Markets in Hong Kong and Mainland China

- This article examines regulatory cooperation and competition on securities markets development between Hong Kong and Mainland China, focusing on the regulation of listing of PRC firms in Hong Kong, the impact of PRC capital account control on Chinese portfolio investment in Hong Kong, and cross-border cooperation - or the lack thereof - on securities law enforcement.- The relationship of regulatory cooperation and competition between securities markets in Hong Kong Mainland China must be understood in its political context, in particular the special relationship between the two sides under the ‘One Country, Two Systems' formula.- Regarding cross-listing of PRC firms in Hong Kong, Hong Kong's better regulatory regime seems to serve as a bonding mechanism for improving corporate governance of the PRC firms. However, a revised interpretation of the bonding effects might be needed given that the road to listing in Hong Kong for a significant number of the PRC firms was under strict political control of the Chinese government.- Mainland China's foreign exchange control laws severely limit free flow of Chinese capital to Hong Kong, although Hong Kong is already heavily dependent upon portfolio investment from the Mainland.- A more imperative problem is the lack of cooperation between the regulators for law enforcement against wrongdoers in corporate scandals involving H-share and Red-chip companies. This fundamentally stems from the structural differences between the political and legal systems in the two jurisdictions.- In the long run, the policymakers on both sides must prepare for challenges arising from the inevitable further economic integration between Hong Kong and Mainland China, including the possibility of establishing a common market.- Hong Kong's future as an international financial centre is tied to its capability to maintain and improve its regulatory environment that can both strengthen its economic and financial integration with the Mainland markets and continue to attract international investors