TAIPEI/HONG KONG, May 12 (Reuters) - A mooted equity trading link between Hong Kong and Taiwan has been described by some traders and investors as a flawed - and potentially costly - attempt to replicate the hugely successful Hong Kong-Shanghai stock connect.
Hong Kong's tie-up with Shanghai since November has sparked an explosion in turnover, with a flood of mainland money boosting Hong Kong Exchanges & Clearing Ltd's (HXEx) market capitalisation to nearly $4 trillion in recent weeks.
Much of the trading has exploited unique arbitrage opportunities created by the large discount between shares of Chinese companies listed in both Shanghai and Hong Kong.
But such conditions do not exist for Hong Kong and Taiwan, and with their stock markets already liquid and open to foreign institutional investors, allowing direct trading on each another's bourse would be a needless and expensive programme, many traders say.
"Major banks and investors are already able to access both markets, so a new link would create additional infrastructure costs," said Stephane Loiseau, head of cash equities Asia Pacific at Societe Generale. "The Hong Kong-Shanghai link was a unique proposition to give investors access to something they couldn't already access."
For Taiwan, a link to the mainland via Shanghai could be a more attractive proposition. Taiwan's technology-focused stocks may attract Chinese investors looking to diversify their portfolios.
"The true benefit of a Shanghai-Taiwan link would be the potential uptick in liquidity should Chinese investors start investing in Taiwan like we've seen hit Hong Kong over the last couple of weeks," said Joel Hurewitz, managing director at international brokerage Instinet in Hong Kong.
Last month, HXEx Chairman Chow Chung Kong said the exchange had had "preliminary" discussions on a link with the $900 billion Taiwan stock market.
A HKEx spokesman said the exchanges would have to consult the Taipei authorities "before anything beyond very preliminary discussions could take place".
Michael Lin, president at the Taiwan Stock Exchange, said the bourses had not "officially" discussed a link-up, and that such a scheme will require policy changes that would "not be happening soon".
His comments reflect the political hurdles that any link bringing Taiwan closer to mainland China would have to overcome.
"Stock connect is a China-led initiative with clear policy aims, and anything done with Taiwan would also have to be led by China. From a practical and political perspective, this could be enormously problematic," said David Millhouse, head of China research at boutique investment advisory firm Forsyth Barr Asia.
Taiwan split from mainland rule following the end of the Chinese civil war in 1949 but has never formally declared independence from China.
Several investors said work on a Taiwan link could not begin before the island's presidential election in January 2016 which is expected to see Taiwan's Democratic Progressive Party (DPP) gain power. The DPP is widely perceived as leaning towards independence from mainland China, making a link in the short term unlikely.
"In the near term, China will be handling Taiwan relations in a slow way," said Alex Huang, a professor on cross-straits ties research of Tamkang University, Taipei. "There is just no need to give benefits such as the Stock Connect to the DPP." (Additional reporting by Lawrence White in Hong Kong; Editing by Ryan Woo)