Watchdog stalls share scheme
Bei Hu and Mark O'Neill in Shanghai
Opposition from regulators and the Sars outbreak have kept mainland investors waiting on chance to buy HK stocks
The Chinese leadership came close to announcing the framework of a scheme allowing mainland investors to buy Hong Kong stocks, but the decision was delayed because of opposition by the China Securities Regulatory Commission (CSRC) and the Sars outbreak.
'In March, there was some significant progress. Some political heavyweights threw their support behind the scheme,' one mainland financial source told the South China Morning Post. 'They were leaning towards endorsing the idea [and] were very close to making a decision. Sars later put the issue on the backburner.'
The source said the scheme's proponents were also unable to overcome domestic resistance to it.
'There were also different opinions. As a consequence, it lost its momentum,' the source said.
In particular, the CSRC was wary that the qualified domestic institutional investors scheme (QDII) would deal a heavy blow to the domestic stock market.
QDII would diversify mainlanders' investment options beyond domestically listed stocks, government bonds and bank deposits at a time of record low interest rates. First proposed by the Hong Kong government, it had been widely expected the scheme would begin by allowing mainlanders to invest in Hong Kong-listed stocks.
The scheme's mainland detractors see QDII as an unnecessary gift to Hong Kong, arguing the scheme's implementation would dampen mainland stock market sentiment and exacerbate an already sizeable capital flight from China.
Although CSRC officials publicly said they had formed a team to work on the scheme, the mainland securities watchdog is among the scheme's staunchest official opponents.
Under heavy pressure from a securities industry coping with widespread losses from two years of market downturns, the CSRC frequently acts to defend artificially high index values.
The CSRC also shelved a proposal to capitalise on the country's social security fund by selling down state shares in listing candidates and publicly traded companies after public resistance to the plan and a crackdown on market fraud resulted in a sharp fall in mainland indices.
But despite the delay, industry observers said QDII was still firmly on the national government's agenda.
Goldman Sachs managing director Fred Hu Zuliu, at a seminar in Shenzhen last week, said: 'I personally think the chances of introducing QDII within one year are more than 50 per cent.
'Within the top leadership of the central government and key decision-making agencies, there are some very open, clear-minded and visionary officials who very much support QDII.'
The recent implementation of the qualified foreign institutional investors (QFII) scheme, allowing foreign investors to buy publicly traded yuan A shares, laid further groundwork for QDII's introduction.
Rebuffing criticism that QDII was a gift for Hong Kong, Mr Hu said QDII would raise mainland investors' expected returns, broaden Hong Kong's investor base and raise the price-earnings ratios of Hong Kong share offers by mainland firms.
A scheme that limited the experiment to investors with existing foreign currency holdings would have little impact on the country's foreign exchange regime or A-share markets and allow for more efficient use of China's ballooning foreign currency deposits, he said.
Stephen Harner, a financial industry consultant based in Shanghai, argued there was already massive investment by mainland Chinese, especially corporates, in the Hong Kong stock market and the purpose of QDII was to guide this money into regular channels.
'For corporate clients, there are many ways to invest the money. We are not talking about retail investors but companies. It is big money,' Mr Harner said.