By Hong Liang
One of the most encouraging news items for the Hong Kong
financial market in recent months must have been the expanded scope
of investment by mainland banks for their clients under the QDII
(qualified domestic institutional investors) scheme.
The benefits that this new decree by China Banking Regulatory
Commission (CBRC) can bring to Hong Kong are seen by policymakers
and economists to extend far beyond the various investment
markets.
Helping to reaffirm Hong Kong's importance as a financial center
to the mainland, the CBRC's decision has greatly bolstered Hong
Kong people's confidence at a time of growing doubt about the
city's relevance to China's economic development.
In a column published on the website of Hong Kong Monetary
Authority (HKMA), the de facto central bank, Joseph Yam, HKMA's
chief executive, eloquently declared that the CBRC's "decision has
longer-term, strategic significance" to the mainland in monetary
management and to Hong Kong in financial market
development.
Yam and other economists in Hong Kong believe that the decision
was an integral part of the capital account liberalization process
which encourages the outflow of funds under a framework of
effective regulation and control. Such an outflow can help relieve
some of the pressures on the exchange rate of the renminbi and on
monetary management brought about by the rising current account
surplus, strong capital inflow and the rapid accumulation of
foreign reserves.
The latest expansion of the QDII scheme also offers mainland
investors a welcome alternative to diversify their enormous savings
from low-yielding bank deposits. The strong desire by mainland
investors for other investment channels has been forcefully
demonstrated by the flood of cash into the stock market from bank
deposits in the past 18 months of so.
At current price levels, the risk-return profile of the Chinese
equity market may have become increasingly unpalatable to a growing
number of mainland investors. The newly created opportunity to
invest in the Hong Kong equity market under the QDII scheme would
seem most welcome despite the inherent foreign exchange risks,
which should remain small.
Further expansion of investment flow from the mainland to Hong
Kong under the QDII scheme and from Hong Kong to the mainland under
the QFII (qualified foreign institutional investment) scheme could
go a long way in addressing the nagging anomaly arising from the
persistent price difference between the Hong Kong-listed H shares
and mainland-listed A shares of the mainland enterprises.
The price differential between these two classes of shares,
which are entitled to the same rights, is a symptom of market
segregation which is understandable but unhealthy, and, as Yam
noted, "should be addressed in an orderly way before the market
springs a surprise on everyone".
The CBRC's decision must be seen as a move in achieving the
objective to allow domestic supply and demand on the mainland to
interact with the internationalized market forces in Hong Kong.
Such interaction is seen as essential for making the market more
structurally stable and price discovery more efficient.
Some market participants may feel disappointed by the
limitations of the QDII quota, which restricts the equity component
to 50 percent and the investment in any one individual share to 5
percent. But as Yam said: "It is more important for us to
appreciate what the mainland authorities are trying to achieve and
the role the financial system of Hong Kong can play in helping to
bring it about."
(China Daily June 12, 2007)