Hong Kong Chief Executive Donald Tsang has endorsed proposals to begin trading Hong Kong and Shanghai-listed shares on each other's exchanges, the Financial Times reported on Monday.

The leader of the autonomous Chinese territory also confirmed that talks were under way on the idea, the report said.

There's no reason why ... stocks listed in Shanghai cannot through some financial instruments be traded in Hong Kong, Tsang said in an interview with the newspaper.

Similarly, I do not see why Hong Kong stocks cannot be co-listed in the Shanghai stock market through an arbitrage arrangement ... We are discussing the mechanics of it.

Mainland Chinese and Hong Kong investors have limited opportunities to access each other's markets because of China's capital controls. This has helped fuel a premium for China's domestically listed A-shares, even when shares of the same company are also listed in Hong Kong.

Recently, Beijing has begun encouraging top companies to list domestically, bucking a long trend of its larger firms selling shares in Hong Kong, London or New York to access international capital flows.

The newspaper said Tsang was the most senior official to voice support of cross-border trading mechanisms such as depositary receipts that could link the world's fifth and sixth-largest stock markets by market capitalization.

The Hong Kong stock exchange and its counterparts in Shanghai and Shenzhen together account for 7.65 per cent of global market capitalization, just behind Japan's 8.48 per cent, it added.

In February, Joseph Yam, chief executive of the Hong Kong Monetary Authority, mooted the creation of certificates of ownership of shares listed on the Shanghai, Shenzhen and Hong Kong stock exchanges, the Financial Times said.

We are helping Shanghai as much as possible to modernize the market, Tsang told the newspaper. There are two different markets. One is an external international global market in Hong Kong and one is a regional market in Shanghai ... We are an international platform way ahead - about 15 years ahead.

Financial officials in Hong Kong believe closer co-operation with Shanghai is needed as it tries to close the gap with New York and London, the report said.

We have overtaken New York in terms of value of IPOs, Tsang said. My sight is set on London.

The Financial Times said the chief executive did not say how far talks had advanced.

This would be a big step for the mainland. They quite rightly have to be very cautious...I do not want to characterize in any way, but I'm very enthusiastic, he said.

The report came as a Hong Kong newspaper quoted the territory's Financial Secretary, Henry Tang, as saying there was an urgent need to deal with the stock price differential between shares of Chinese companies listed in Hong Kong and mainland A shares.