Hong Kong is in many ways independent of mainland China but the island's financial regulators are hampered when it comes to major Chinese companies listed there
Hong Kong is part of China but under the "one country, two systems" framework.
It operates under its own law, has its own monetary and fiscal policy as well as a mini-constitution called the "Basic Law".
In general, this arrangement is a good thing for Hong Kong; residents can criticise the communist government of China in ways that would land them in jail on the mainland.
But the same system that protects capitalism and civil liberties in Hong Kong much better than the mainland has a flip side: it also means the Hong Kong authorities do not have any jurisdiction in mainland China.
This state of affairs is now starting to throw up some real problems regulating the companies listed on the Hong Kong Stock Exchange (HKSE).
The biggest, such as China Mobile or Petro China, are not based in Hong Kongand have most of their assets in mainland China. In effect, the HKSE has become the "foreign currency board" for China because the Chineseyuan, unlike the Hong Kong dollar, is subject to capital controls.
So now you have a situation on the HKSE where the biggest companies listed in Hong Kong are not really under the effective jurisdiction of Hong Kong's stock market regulator, the Securities and Futures Commission (SFC).
The SFC is a well-respected and professionally run organisation that does its job well. But its ability to regulate, let alone punish, many companies listed on the HKSE should they breach the rules is limited by the fact that it can only ask the mainland equivalent, the China Securities Regulatory Commission (CSRC), to help with Chinese companies listed in Hong Kong.
The contradictions inherent in this state of affairs have been highlighted recently by the case involving China's biggest retail companyGome Electrical Appliances Holding.
The former chairman and founder of the company Wong Kwong-yu is in prison in China, having been convicted of cheating mainland-based shareholders of millions of dollars.
But Wong is still allowed to own shares in the company and given the peculiar way the law operates in China, he was even able to launch a boardroom offensive to try to oust the current management, led by Chen Xiao. Wong lost the battle by just 4 per cent of the votes.
The board meeting was held in Hong Kong but the SFC was not able to deliver a summons to Wong's sister, whom he had nominated as his own candidate to regain control of Gome Electrical; China's CSRC, whatever its motivations might be, is a more effective protector of shareholder rights than the SFC, whose writ does not run beyond the tiny Hong Kong land mass, into mainland China.
The SFC and CSRC do have a bilateral agreement to assist in the other's investigations under an agreement signed in 1993.
The agreement does work in minor cases and the CSRC has assisted investigations of Chinese nationals based in mainland China. But things stop working under the "rule of law" when very powerful personalities - such as the chairman and other directors of the retailing giant Gome - are involved and CSRC stalls.
The Gome affair is only the tip of the iceberg.
The peculiar situation where the SFC really has no enforceable jurisdiction over some of the biggest companies listed under its watch is likely to continue to throw up many more knotty problems in the near future.