SUN
WUKONG China-to-HK 'money diversion
project' delayed By Wu Zhong,
China Editor
HONG KONG - China has
postponed the implementation of a policy that
would allow individual Chinese citizens to trade
in shares listed on the Hong Kong Stock Exchange
(HKSE) without capital restrictions. The
postponement, though unlikely to be indefinite,
shows the lack of coordination among various
central-government departments overseeing
financial affairs.
The latest development
shows that Beijing is re-examining the
potential risks of the
opening-up plan, which now won't be launched for
another couple of months, according to a China
Securities Journal report last week. This suggests
the government may start the pilot project after
the conclusion of the all-important 17th National
Congress of the Chinese Communist Party, which is
set to begin on October 15.
On August 20,
the State Administration of Foreign Exchange
(SAFE) announced the launch of a pilot program in
Tianjin's Binhai New Area on a trial basis to
allow citizens to buy hard currency to invest in
overseas securities. At the initial stage, Hong
Kong is designated the sole overseas securities
market for the pilot project. According to the
SAFE announcement, there will be no limit to the
amount of hard currency a person can buy for
overseas securities investment.
Until now,
individual mainlanders have been allowed to invest
in overseas securities with their yuan funds only
through the Qualified Domestic Institutional
Investor (QDII) program with capital quotas. In
addition, each person is allowed to buy US$50,000
(or the equivalent) per year for personal use.
The SAFE announcement was immediately
taken as bullish news in Hong Kong, with the HKSE
soaring to record highs.
In daily
Cantonese usage in Hong Kong, the word for "water"
also means "money". Hence Hong Kong investors
nicknamed Beijing's new policy a "north-south
water-diversion" project that would open the gates
wide to let money flow from the north into the
local stock market. Some local commentators have
even concluded that Beijing's move is aimed at
boosting Hong Kong's securities industry in face
of international market turmoil caused by the US
subprime crisis.
It was noted in this
column on August 22 (China takes a currency leap
forward), however, that helping Hong
Kong may be the least of the program's purposes.
China launched it as part of an effort to achieve
larger financial goals, such as helping cool the
overheated mainland stock markets, easing the
problem of excess liquidity and better management
of the country's huge and still growing
foreign-exchange reserves. Furthermore, the column
said, "the program signals a significant step
toward full convertibility of the Chinese currency
by further liberalizing the yuan on the capital
account".
From this perspective, the pilot
program marks the start of a profound reform of
China's financial system and of its
foreign-exchange regime. Such a comprehensive
reform involves various financial sectors with
huge potential risks. Hence the decision on its
launch should have been made by the State Council,
China's cabinet, coordinated with various
authorities concerned.
When SAFE posted
its announcement on its website on August 20,
everybody took it for granted that it was made on
behalf of the central government. But it turned
out to be a decision made by SAFE alone.
Thus it was no wonder that one week later,
when the pilot project was expected to be
officially kicked off, reports surfaced that a
brake was ordered by the State Council after other
financial regulators expressed their concerns
about potential risks to the country's financial
security.
The China Securities Regulatory
Commission (CSRC) is afraid that the QDII scheme
would be sidelined as citizens rushed to make
individual overseas investments. The domestic
A-share market may also be affected as the new
policy may cause an exodus of funds.
It
also fears that mainland individuals, who are not
familiar with rules of such a fully open stock
market as that in Hong Kong, could easily fall
prey to much more savvy international investors.
Then they might blame the government for the
opening-up.
The China Banking Regulatory
Commission is worried that the pilot project may
open a new channel for money laundering if the
outflow of funds is not effectively supervised,
and the People's Bank of China, the country's
central bank, is concerned that the new policy may
lead to massive withdrawal of savings from banks,
posing a threat to the stability of the country's
banking system.
In addition, other cities
such as Beijing, Shanghai and Guangzhou, which are
also eager to develop their financial industries,
complained that the pilot program was granted to
Tianjin alone.
Hence the State Council
ordered thorough studies of potential risks to the
country's financial security brought about by the
pilot project, and of possible measures to avoid
or reduce such risks.
China Securities
Journal said last Wednesday that the studies might
take a couple of months, suggesting the pilot
program is likely to be launched before the 17th
Party Congress but Beijing, Shanghai and Guangzhou
would also be included.
It may not be a
mere coincidence that reports about the
postponement of the project came after President
Hu Jintao delivered a speech at a Politburo
meeting stressing the importance of safeguarding
the country's financial security.
"Work to
prevent financial risks must be strengthened with
the expanded opening up [of the industry], so as
to safeguard our country's financial security ...
Supervision must be further strengthened with the
development of the financial industry. Financial
supervision must be regarded as the utmost
important task among all financial works," Hu
said, according to the Xinhua News Agency.
Out of concern over the risks to the
country's financial security, Beijing is certain
to take a more cautious attitude toward the
opening up for outbound investment by individuals.
In this regard, it may take a gradualist approach
like the one toward the liberalization of the
Chinese currency. In other words, more and
stricter restrictions are likely to be imposed on
the pilot project so as to make the outflow of
funds more controllable.
Hence CSRC
chairman Shang Fulin last Thursday was able to say
the amount of funds able to be invested in Hong
Kong shares by individual mainland citizens would
be limited in the initial stages, which would not
have a significant impact on the A-share market.
Also, the threshold for an individual to
open an account for investment in Hong Kong shares
would be raised to 300,000 yuan (US$39,000) from
100,000 yuan.
A researcher with the
Chinese Academy of Social Sciences said Beijing's
gradualist approach in this regard in fact should
be in favor of healthy and steady development of
Hong Kong securities market. "Under such an
approach, mainland money will flow into the Hong
Kong market like tap water, which is healthy for
steady development," he said.
Some Hong
Kong investors had hoped that the gate could be
fully opened so huge funds could come down to send
the stock market even higher. But in the
researcher's view, this implies enormous risks for
the Hong Kong market and economy.
If the
gate were fully opened, money could come like a
devastating flood, as many mainland investors hope
to buy H-shares issued in Hong Kong by mainland
companies whose prices have big discounts compared
with their A-shares traded in Shanghai or
Shenzhen.
This may pose a serious
challenge to the Hong Kong dollar's peg, the
researcher said. With huge funds flowing into the
city, the demand for the local currency would be
enormous, which would make it stronger. Under the
peg, the Hong Kong Monetary Authority would have
to sell more Hong Kong dollars.
"When huge
funds come in daily, it may not be so easy for the
monetary authority to handle," he said. On the
other hand, when mainland investors make profits
and pull their funds out, they will sell Hong Kong
dollars. Hong Kong must be prepared to deal with
the flow of massive funds if China fully opens its
gate. "Don't underestimate the capacity of
mainland investors. The daily trading in Shanghai
and Shenzhen used to be more than 300 billion
yuan."
Also, the gradualist approach would
give time for mainland investors to learn how to
play with Hong Kong shares following international
market rules.
"If the first batch of
mainland investors become immediately trapped
after entering the Hong Kong market, others may be
scared off and refrain from coming to Hong Kong.
This certainly would not be the outcome Hong Kong
investors would like to see," the researcher said.
(Copyright 2007 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
