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Slow start to Shanghai-Hong Kong stock exchange

I'd like to get you on a through train to Hong Kong...but not too desperately.Photograph by Mark Ralston — AFP/Getty Images

The new stock market link between Shanghai and Hong Kong that opened this week to big fanfare corrected what has long been a cruel unfairness in China: that shares of its best companies, such as Baidu Inc (BIDU), Alibaba (BABA), and Tencent Holdings (TCEHY) (known as the collective BAT) can’t be bought by Chinese mainland investors.

China’s strict outbound money rules prevent mom and pop investors (or their mutual fund managers) from buying overseas stocks such as Alibaba, which is listed in New York. By the same token, foreign asset managers couldn’t, until this week, buy mainland Chinese stocks except through a hugely cumbersome permissioning process.

Hong Kong is a popular listing for many Chinese companies, where Tencent, China Mobile, and Lenovo Group (LNVGF) are among those listed there and newly eligible for mainland investors. But by Wednesday, the Chinese showed little interest in owning their national champions.

The money flows through the first three days of China’s meaningful stock market reform mostly went northbound from Hong Kong’s international investors into mainland China. At the end of Wednesday, northbound investments represented 20% of the daily cap on flows; southbound flows, from mainland investors to Hong Kong, were just 2.5% of the daily cap. Similar low levels of southbound money were evident on Monday and Tuesday.

All those anticipating a flood of money in both directions were left looking a bit Pollyannish. Tencent capped its third straight day of losses today, falling 5.5% in Hong Kong since Monday after rising for days, partly in anticipation of the link to mainland investors; Lenovo and China Mobile similarly sold off when anticipated money flows never came.

The explanations for the rise that never came might boil down to teething troubles. It’s still not entirely clear, for instance, how the differing tax regimes in Hong Kong and Shanghai will be reconciled–despite Beijing’s announcement last week that it would temporarily exempt some taxation of capital gains. Also, Chinese investors have to wade through new regulations and many of the Hong Kong stocks are listed in Shanghai too.

It might also have something to do with the fact that China’s economy may no longer be able to deliver the kind of growth that equity markets have long taken for granted.

But allowing everyone a chance to own the best of China’s listed companies, be they in mainland China or Hong Kong, is an exciting change and “a successful connection could even prompt existing New York-listed companies like Alibaba and Baidu to consider secondary listings in Hong Kong,” wrote Doug Young on his blog following Chinese stocks.

Maybe then, Chinese investors could join the American TV talking heads and Wall Streeters obsessing over BABA’s daily swings.