China's policymakers want to recycle more capital abroad in order to reduce upward pressure on the yuan and slow official reserve accumulation.
Before they can achieve any meaningful results, however, they will have to twist a few arms among the country's different financial regulators in order to get the current rules changed. When they succeed, it will be good news for Hong Kong's stock market.
It is now a year since China announced its qualified domestic institutional investor, or QDII, initiative intended to allow mainland financial companies to invest abroad on behalf of their clients.
By any standards, the scheme has been a dismal failure. To date, domestic and international banks, insurance companies and a lone fund manager have been allotted quotas worth almost US$18.5 billion to invest in foreign markets. Estimates of how much money has actually been invested differ, but most analysts seem to agree the amount is somewhere between US$500 million and US$1 billion. In other words, in the year since the QDII scheme was introduced, only around one day's worth of China's foreign exchange inflows has been recycled abroad.
The reasons for this woeful lack of interest are simple enough. When the QDII scheme was first promulgated, the officials who drew up the rules erred deliberately on the side of caution.
The China Banking Regulatory Commission has so far restricted banks to offering bond investments. The mainland's insurance regulator has yet to approve any life insurance company investment beyond a couple of initial pilot schemes. And the China Securities Regulatory Commission has dragged its feet over allowing the fund managers and stock brokers it oversees to launch international investment products of their own.
As a result, the investment products on offer are desperately unexciting. By buying into a bank-run QDII product, clients of mainland banks can expect to earn a yield of about 5 per cent from its investments in US dollar-denominated bonds.