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Will deregulation lead to the next Asian trade boom?

China and Hong Kong have always been poles apart when it came to investing. Lars Henriksson explains how that could all be about to change.

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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.

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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).

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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%.

Why trade in services matters

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.

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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.

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