Through-Train's Significance

WSJ did a write up on the "through train" program which was hinted in August 2007, and was largely responsible for propelling the Hang Seng index from 24,000 to 30,000. Since November, the China markets (Shanghai and Shenzhen) have been on a substantial correction phase. Now Hong Kong's investors could use the Chinese government's help, but it isn't clear when that help may come. Last week, there was a report which cited that there could be a 2 year delay before the program will be implemented. That caused a panic among the retail investors thus explaining for the volatility in HSI over the past week.

Until that happens, one significant leg of support for last year's gains in Hong Kong shares is going to be increasingly wobbly. If that support is removed altogether, Hong Kong stocks could be in for a bigger bruising than they've already had. The move was proposed by the HK financiers initially to help create valves to let out some of the liquidity in the mainland. Since then, the subdued China markets have caused Beijing to be very quiet on the "through-train" program.

The Hang Seng rose 55% from its August low to a late October high, following that news and the Federal Reserve's decision to slash interest rates in the U.S and also theanks to the "through-train" program.

Shares of Chinese stocks listed in Hong Kong, reflected in the Hang Seng China Enterprises Index, did even better, gaining about 85% over that period.

Based on the prospect of coming inflows, investors in Hong Kong began to demonstrate a kind of immunity to global turmoil. That immunity had previously only been apparent in mainland China, and stocks in China and Hong Kong surged while other markets wobbled. However, since the news of the delay, the invincibility of HK stocks have evaporated substantially. So these traders have gone back to worrying about the other factors that affect stock prices.

There is reason to think the plan will eventually be approved. Last week the head of the Hong Kong Monetary Authority, Joseph Yam, was reported as saying the plan is "an important project and we hope to start it soon." Of course Yam would say that, but the real authority still lies in Beijing. Other officials, most notably Chinese Premier Wen Jiabao, have raised concerns about the plan in the past. Mr. Wen said the government had to first consider the potential negative effects the plan could have on both mainland and Hong Kong markets.

There are many who still think that the "through-train" program will be introduced this year. That is risking a lot on the line for a big maybe. People should really forget about the "through-train" for the time being. It will highly unlikely as long as Shanghai and Shenzhen markets are subdued.

One should be buying on the Fed's likelihood to cut rates substantially in the near term, which will have a huge effect on HKD which is pegged and on the HK lending rates which are higher that in the US. The higher rates in HK will suck in more liquidity, and at the same time HKMA cannot risk lowering rates too fast in an already vibrant economy. The unbalanced equation will provide HK with a stronger reason to buy stocks than other markets. For now, HSI will continue to drop like the rest as the equity markets in general have a lot more pressing issues to contend with.