Will deregulation lead to the next Asian trade boom?

Deregulation is opening the doors to China

It seems crazy in a way. China and Hong Kong are right beside one another and yet when it comes to stock trading, they might as well be on opposite sides of the world.

For years, China has guarded its economy tightly. I can only imagine how frustrating that must be for all those sophisticated investors sitting on either side of the border. They’ve got the money, the connections and the ideas, but there’s always been strict rules preventing them from getting together. That’s all about to change.

Last week, China and Hong Kong announced a pilot scheme called the Shanghai-Hong Kong Stock Connect – allowing seamless trade in certain shares listed in Shanghai (SSE) and Hong Kong (HSE).

This ‘through train’ system has been on the drawing board for more than seven years and is expected to prove hugely beneficial for both countries. Investors seem to have given it a thumbs up as the Hong Kong market moved higher, though most adulation was given to the Hong Kong exchange (HK: 388).

The Stock Connect is a great example of what increased deregulation of trade could do for global business. Further gains can be achieved by simplifying and harmonising the procedures to move services across borders.

The World Bank estimates such improvements, agreed at the meeting in Bali late last year, could boost two-way trade by 20%, increase the region’s real GDP by 2.7% and employment by 1.2%.

the-new-world-250x59

If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.

'The New World' is MoneyWeek's FREE globally-focused weekly email, bringing you the most exciting investment stories from Asia and Latin America.

Sign up here FREE to The New World email

Why trade in services matters

This through train is an essential component to boost ‘trade in services’ – which basically refers to the service sector. Right now, trade in services has never been more important for Asia. The continent has a fairly competitive external (trade) economy, while the internal (service) sector is riddled with inefficiencies.

However, in the recently released bi-annual “East Asia and Pacific Economic Update”, the World Bank points out that trade within East Asia is increasingly shifting from trade in products to trade in services.

Specifically, the lender emphasises that “The share of GVCs [global value chains – these  represent the process of ever-finer specialisation and geographic fragmentation of production] in the region’s total trade is nearly 40 percentage points greater than two decades ago, and GVCs account for a greater share of trade in East Asia than in any other developing region. This changing dynamic has driven much of the regional clustering of value chains and paved the way for closer regional integration.”

For years, countries have been pushing for common guidelines that allow for the free flow of services across borders.

Having grown tired with the World Trade Organisation’s (WTO) slow progress to liberalise trade in services, over 23 members, including Taiwan, the Republic of Korea and Hong Kong, have taken matters into their own hands and are in the process of establishing the Trade in Services Agreement (TISA).

The hope is that the agreement will create trading conditions that will allow countries’ services sectors to achieve their full potential. Together, these 50 participants account for 70% of the world’s trade in services. Now China looks set to join as well.

When China joined the World Trade Organisation in 2001, it was a big moment in history – the start of a huge Chinese trade boom. That boom was based on cheap manufactured goods. Now China wants to repeat the trick for trade in services. There are interesting times ahead.

This article is taken from The New World, MoneyWeek's FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

MoneyWeek magazine

Latest issue:

Magazine cover
The dollar's going up

Why your British stocks will follow

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Hedge fund manager Hugh Hendry: 'It felt like the sun rose only to humiliate me'

In a series of three short videos, Merryn Somerset-Webb talks to Hugh Hendry, manager of the Eclectica hedge fund, about everything from China to the US, Europe, and Japan.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


17 December 1900: The Guzman Prize is announced

On this day in 1900, Clara Guzman stumped up 100,000 francs prize money for the first person to communicate with and receive a response from another planet.