HONG
KONG - Beijing's decision to allow qualified
mainland financial institutions to trade in
overseas equities for their clients is unlikely to
have a major impact. The quota set by the Chinese
government is very small, currently US$13.4
billion, and the outflow of capital from the
mainland is also expected to be gradual.
Hong Kong had expected to benefit most
from the new ruling, but after stocks shot to a
record high on Monday and Tueasday morning, the
Hang Seng Index cooled after analysts' warnings and
profit-taking to fall 111.09
points, ending at 20,868.
The China
Banking Regulatory Commission (CSRC) gave the
official go-ahead on Friday to allow commercial
banks on the mainland that hold qualified domestic
institutional investor (QDII) certificates to
issue wealth management products that invest in
overseas stocks.
A qualified bank will be
allowed to invest no more than 50% of a single
wealth management product in overseas stocks.
Banks are also barred from investing more than 5%
of a wealth management product in a single stock,
the securities regulator said in a statement
posted on its website on Friday. Banks are also
forbidden from using their own money in such
investments, the CSRC said.
The move was
immediately welcomed in Hong Kong as it would
benefit most from the new policy. Joseph Yam
Chi-kwong, chief executive of the Hong Kong
Monetary Authority, the territory's de
facto central bank, said that the expansion of
the QDII program is a "strategically important
move" that could help take some pressure off the
appreciation of the yuan.
The move will
allow the "orderly outflow of capital" from China
markets, which are awash with liquidity, and allow
"a more rational and healthy development", he
said.
"The expansion of the investment
scope of the QDII scheme will be a win-win measure
that will benefit both the mainland and Hong Kong
financial markets," said Yam.
But analysts
immediately caution that the market stimulation of
the expansion of the QDII program should not be
exaggerated.
In the first place,
restricted by the quota set by the Chinese
government, the outflow of capital through the
QDII program will be very limited.
China
started the QDII program in July 2006, allowing
QDIIs to raise yuan funds from domestic
individuals and institutions and convert them into
foreign currency for overseas investment. The
program is aimed at reducing foreign exchange
reserve pressures. In the whole of last year,
China approved 15 banks on the mainland, including
foreign-invested ones, as QDIIs, with the China's
State Administration of Foreign Exchange granted
them overseas investment quotas totaling US$13.4
billion. (Meanwhile, 15 insurance companies were
granted overseas investment quotas of $5.17
billion and one fund management company was given
a quota of $500 million.)
Also, QDII
expansion will be gradual, said Ronald Wan
Ten-lap, managing director and head of investment
banking at Bank of Communications Securities. "The
fanatic A-share rally [on the mainland] will keep
the mainland capital from flowing out too
quickly," he said.
Though H-shares will
probably close their price gap with A-shares,
"it's unlikely to move the Hong Kong market as a
whole", Wan said.
After the leap in the
Hong Kong market, BOCI research vice president
Peter Pak Ngan said the rally may not last long.
"The rises among those H-shares which also have
A-shares listed in the mainland was way too much
for the day," he was quoted by The Standard
newspaper as saying. "The market may turn stable
or undergo mild correction after the run extends
for one or two more days."
Pak said the
rally did not just price in the approval of
possible fund flows from the mainland to Hong Kong
equities, but went a lot further than that.
"Currently, the quota for the QDII program is very
small. The market was pricing in a big increase in
the quota."
Other analysts said the strong
momentum may continue, at least in the short term.
But some mainland stocks listed on the local
exchange had outpaced their fundamentals, making
them vulnerable to a correction.
Tanrich
Securities director Patrick Pun Tit-shan is more
positive for the longer term, and expects the bull
run to continue for the next two weeks. "I believe
some mainland money sneaked into the Hong Kong
market ahead of the actual QDII money," Pun said.
John Ng is a freelance
journalist based in Hong Kong.
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