Hong Kong–Shanghai Connect/Hong Kong–Beijing Disconnect? Scaling the Great Wall of Chinese Securities Trading Costs

In this article, the author utilizes a fundamentally different model of trading costs to look at the effect of the opening of the Hong Kong Shanghai Connect, linking the stock exchanges in the two cities. The author designs a novel methodology that compensates for the lack of data on trading costs in China. He estimates trading costs across similar positions on the dual listed set of securities in Hong Kong and China and then compares actual and estimated trading costs on a sample of real orders across the Hong Kong securities in the dual-listed pair to establish the accuracy of his measurements. The primary question the article seeks to answer is, “Which market would be better to trade to gain exposure to the same (or similar) set of securities or sectors?” The author finds that trading costs on the Shanghai exchange, which might have been lower than on the Hong Kong exchange, seem to have become higher leading up to the Connect. It remains to be seen whether this increase in trading costs is a temporary equilibrium due to the frenzy to gain exposure to Chinese securities or whether it will persist as the two markets become more tightly coupled. Future study should examine whether this pioneering policy will lead to security exchanges across the globe linking up, creating a trade anything, anywhere, and anytime marketplace. Looking beyond mere trading costs, such studies can be used to gather evidence the effects mode of governance and other aspects of life in one country have on another country once they start linking their financial markets.