Beijing's long-standing plans to allow mainlanders to invest overseas is expected to release large capital inflows into small-cap companies in Hong Kong as retail investors on the mainland seek to take advantage of lower valuations in Hong Kong markets, a veteran Chinese banker said.
"The inexpensive valuations among the smaller-capitalised firms in Hong Kong offer a strong appeal to retail punters on the mainland, who often favour high-growth small companies over blue chips," said Yim Fung, chief executive of the brokerage Guotai Junan International.
Yim, who was talking at a seminar hosted by the Hong Kong Investment Funds Association, said the new round of the mainland's Qualified Domestic Individual Investor Scheme (QDII2), a pilot programme aimed at boosting overseas investment for individual mainlanders, should prompt more capital inflows into the city's smaller firms.
Hong Kong's small companies are trading at an average price to earnings ratio of 10 times, against p/e ratios of 30 to 40 times on the mainland, Yim said, and these cheap valuations could spur mainland interest.
The mainland government began to broaden the channels available to individual mainlanders to buy securities in overseas markets by introducing the Qualified Domestic Institutional Investors (QDII) scheme in 2006. Under the QDII framework, regulators approved a total investment quota of 85.3 billion yuan (HK$106.6 billion) for 110 institutions by the end of April this year, half of which went to securities firms. Almost 30 per cent of the quota went to insurers and 13 per cent to banks.
In January this year the People's Bank of China said it would prepare for the trial of the QDII2 as one of its two major goals for the year.
Yim said he expected that investors participating in the QDII2 scheme would be required to have at least 500,000 yuan in cash and the trial programme would be a nationwide policy.