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Hong Kong-Shanghai stock exchange link casts shadow on protests

Linking markets may be a sign of Beijing's confidence that Hong Kong's pro-democracy protest movement has fizzled

Chinese financial regulators announced Monday that they will go ahead with plans to link the Shanghai and Hong Kong stock exchanges, in what analysts call a sign that Beijing is confident the floundering Hong Kong protest movement for greater political freedoms is nearing its end.

Starting Nov. 17, Chinese authorities will allow $3.8 billion in daily cross-border share purchases between the two cities’ stock exchanges, and nearly half of that amount can originate in either Hong Kong or Shanghai, according to an announcement posted on the websites of the China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission.  

The news had an immediate impact as Chinese stocks rose on Tuesday, hitting a more than three-year high led by financial shares on positive sentiment over the Nov. 17 launch of the Shanghai-Hong Kong stock exchange link.

"The positive impact from the link will persist for a while," said Zhang Qi, analyst at Haitong Securities in Shanghai.

Analysts have hailed the move as an opportunity to welcome unprecedented amounts of capital into companies listed on the highly regulated mainland China market. But it may also serve a political purpose, little over a month after protesters in Hong Kong disrupted business as usual — blocking main thoroughfares and getting into clashes with residents and police in the financial hub to demand a greater degree of electoral freedoms from Beijing, which has ruled that it will prescreen candidates for the city’s top office. Hong Kong, a British colony until it was returned to Chinese rule in 1997, has a constitution that promises the city — which is designated as a Special Administrative Region — a "high degree of autonomy" from Beijing.

“At a time when there are protests, it (the stock market decision) is a gesture on the part of the central government to support the current leadership in Hong Kong,” said Yang Dali, a professor specializing in China’s political economy at Chicago University.

“There was some concern Hong Kong would be destabilized,” Yang said. “The decision is recognition that Hong Kong’s stock market hasn’t been destabilized by the demonstrations.”

At the onset of the recent pro-democracy protests, Hong Kong Polytechnic University business professor Kevin Tsui told Al Jazeera that Beijing could help quell unrest by threatening to undo Hong Kong’s status as a regional financial center.

Since 2013, when the Hong Kong protest movement’s leaders started organizing, China’s central government has been cultivating alternative financial hubs on the mainland, gradually loosening regulations for international business interests.

“Both Shanghai and [Shenzhen, a large mainland industrial city near Hong Kong] are likely to play a more significant role if the situation in Hong Kong gets worse,” Tsui said.

But if Hong Kong instead quiets down, some analysts believe China would want to give the city's finances a boost. 

“If the leaders in Hong Kong can settle the unrest,” Tsui said, “the Chinese government may give Hong Kong a more important role” in Beijing’s endeavors to internationalize China’s renminbi currency — a move that Tsui said would reaffirm Hong Kong’s role as a financial hub and “sort of buy support from local people.”

This is what Columbia University Chinese business professor Arthur Dong calls a “carrot” to motivate Hong Kong officials to stand firm against the protesters, and its business community to continue promoting an end to the demonstrations.

“Without a doubt, when you look at the broader history of Hong Kong-[mainland] China relations, [Beijing has] often managed that with ... carrots and sticks,” Dong said. “China is resorting to the use of carrots to get policymakers to agree with its policy.”

But it may be a stick in disguise. The move also serves to boost Shanghai’s role as a parallel finance hub.

“China has made no secret they wish to have a greater financial infrastructure in place to rival Hong Kong or Singapore,” Dong said. “Although they deny this, it’s clear they seek to create a financial center in Shanghai that would rival that of Hong Kong.”

Dong said that some obstacles in the way of establishing Shanghai as a rival financial hub include a lack of the stronger rule of law that the international business community sees as safeguarding investment in Hong Kong.  But with Chinese President Xi Jinping’s burgeoning anti-graft campaign and proposed legal reforms, that advantage also remains uncertain for Hong Kong.

For its part, Beijing has not said that the decision to link the two stock markets has anything to do with Hong Kong’s demonstrations.

The move aims to “spur the development of both the mainland Chinese and Hong Kong capital markets,” China’s Securities Regulatory Commission said in a press release.

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