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Investors from mainland to get market access

Billions will flow into equities in Hong Kong and overseas

Mainland residents will soon be allowed to invest in the Hong Kong stock market as well as those of foreign countries, in a significant liberalisation of the central government's foreign exchange policy.

The launch of the so-called qualified domestic institutional investors (QDII) scheme was expected to be announced in the next few weeks, informed sources said yesterday.

The move will provide a boost for the battered Hong Kong economy as the special administrative region's stock market is widely seen as being the primary beneficiary when the money begins to flow.

Analysts said the scheme would help put to good use the ballooning foreign exchange reserves of mainland individuals and corporations eligible for the QDII scheme.

It is estimated that mainland individuals and corporations hold about US$150 billion in foreign exchange. The government held a whopping US$316.09 billion by the end of March.

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Andrew Sheng, chairman of the Hong Kong Securities and Futures Commission, last week met several top mainland banking officials in Beijing.

They included People's Bank of China governor Zhou Xiaochuan, head of the State Administration of Exchange Controls Guo Shuqing, China Securities Regulatory Commission chairman Shang Fulin and China Banking Regulatory Commission chairman Liu Mingkang.

The officials are said to have finalised details of how the QDII scheme will work.

'If confirmed, the launch [of the scheme] will mark a significant milestone in Beijing's cautious moves towards liberalisation of its foreign exchange regime,' said Charles Li Xiaojia, chairman and chief executive officer of JP Morgan Chase's China operations. 'The scheme is expected to provide a much-needed psychological boost to Hong Kong's stock market.'

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The scheme is likely to target the H shares and red chips - those listed stocks controlled by mainland companies - traded on the Hong Kong market.

The stocks are already the target of illegal money flowing from the mainland as they trade at attractive valuations compared with mainland-listed A and B shares.

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Fred Hu, a managing director of Goldman Sachs in Hong Kong, said yesterday the timing of the launch would be very good if it came in the next few weeks.

'This would focus much attention on the mainland and Hong Kong economies at a time when they have been hit hard by the outbreak of Sars,' he said.

'It will help reinforce the determination of the new leadership to carry forward with economic reforms and help restore the faith of foreign investors in the mainland's and Hong Kong's economic development.'

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The mainland's economy and credibility took a beating in the wake of the central government's initial disastrous handling of the Sars outbreak.

The QDII scheme was proposed after the Asian financial crisis in 1997. Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong is one of the main proponents of the scheme.

It initially met strong resistance from some government officials who privately resented the idea of the central government using foreign exchange reserves to help Hong Kong. Also, many officials worried that the scheme would accelerate capital flight.

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'Of course, helping Hong Kong is part of the equation but it is not the sole factor,' one source said. 'At stake is China's determination to push forward with economic reforms, particularly in the area of foreign exchange.'

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