For a government so famously inept at exerting control over domestic markets and money supply through its public utterances and regulatory meddling, the fiasco over the last few weeks concerning the so called money through-train scheme must come as a pleasant surprise to Beijing. Well it could have if they didn't have to backtrack on their original plan, and if the effect had been the one they were aiming for.

Initially conceived by the State Administration of Foreign Exchange (SAFE), a body under the central bank, as a means of letting out some accumulated foreign exchange by allowing mainland residents to invest in Hong Kong securities, the plan lead to a share hike in Hong Kong in August in anticipation of the liquidity injection.

Unfortunately for SAFE, the banking and securities regulators weren’t consulted on the plan (or if they were it was probably over champagne and “karaoke singers” in one of the nation’s more exclusive KTVs and they promptly forgot). Justifiably, they slammed SAFE for not thinking the implications through, including the risk that billions of dollars in funds could flee local share markets and lending institutions, putting both at risk. The Hong Kong regulators were also apparantly kept in the dark.

Now that the plan has effectively been scotched by premier Wen Jiaboa through some murky call for further consultation and investigation, HK shares have tumbled again, suffering their worst fall since September 2001 on Monday.

“The nature of the [Hong Kong] market has changed since August 20 to become much more news-oriented,” Castor Pang, strategist at Sun Hung Kai Financial Group, told the Financial Times in reaction to Wen’s comments. “Now fundamentals don’t indicate how prices are going to move.”

Chinese bourses are also famously news-orientated, but unfortunately the habit of Chinese regulators to work in silos sans communication with their regulatory partners means the markets tend to respond to the wrong pronouncements, and in the wrong direction. Want to avert a real estate bubble? Make some grand pronouncement to talk up stocks. And when they go through the roof? Talk up real estate. Genius, except the ad-hoc knee-jerk regulatory approach doesn’t work.

What China needs (and everybody knows it) is an umbrella regulator looking at the big financial picture rather than the current mish-mash of banking, securities, insurance, foreign exchange and so on regulators concerned only about their own little silo.

There is no doubt SAFE’s idea was a good one, if only in isolation, and in theory. Surely they should have predicted the response of their fellow regulators. And the inevitable indecision and the backtracking that followed helps no one. In the absence of a financial markets regulator, China has effectively achieved nothing other than exporting its own peculiar brand of uncertainty to Hong Kong.

The former British colony is becoming more Chinese by the day, and by the pronouncement.