Six years after proposing 'channeling water from the north to south', the hopes of Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong finally became reality yesterday when the mainland announced that domestic banks could invest in the city's stock market. Mr Yam was the first Hong Kong official to bring up the idea to let mainland capital invest in the city in 2001. But that was not Beijing's priority at that time, as it needed to boost the mainland's economy and stock market. Since then, the country went through several reforms and its economy managed to grow more than 10 per cent over the past few years. At the same time, the government built up US$1.2 trillion of foreign reserves, the largest in the world, fuelled by a growing trade surplus. However, its swelling reserves and trade surplus have drawn increasing pressure, particularly from the United States, to make its currency, the yuan, appreciate faster. Such pressure led to the revival of the proposal to let domestic funds invest overseas in 2006, when the qualified domestic institutional investor (QDII) scheme was launched. Under the scheme, fund management firms and banks are granted quotas so they can design financial products for their clients and use the funds raised to invest overseas. Banks, which hold more than 95 per cent of the total quotas, can only invest in fixed-income products such as bonds that tend to generate stable but low return, while fund management firms can buy stocks. More than 50 local and foreign lenders in the mainland have been granted a total of US$14 billion worth of quotas so far. But their QDII products have not been popular because investors preferred to keep funds locally to invest in the surging stock market and in anticipation of further appreciation of yuan. Only 30 billion yuan worth of products have so far been launched by 20 banks, making up just 2.7 per cent of the total quota. The expansion of the QDII scheme for banks to invest in overseas stocks may make the banks' products more attractive and could help ease the pressure to let the yuan appreciate. The QDII licensed institutions would at least have more freedom to package the higher-risk products to mainland investors seeking higher returns, said Andrew Fung Hau-chung, deputy general manager and head of investment and insurance at Hang Seng Bank, which has a quota of US$1.1 billion. It is also hoped that the move would help divert surging capital inflow into the overheating mainland stock market, where the benchmark Shanghai Composite Index has doubled to 4,000 points in just six months. 'Overseas investments would allow mainlanders to diversify their risks. There can also be more arbitrage activity between the two markets,' said Taifook Securities managing director Peter Wong Shiu-hoi. Banks will have to use existing quotas to invest in stocks abroad as the mainland regulator did not grant additional quotas for the expansion. Their investment in listed equities through a QDII fund cannot exceed 50 per cent of the total assets while the maximum investment in a single stock is 5 per cent of a fund. Hong Kong will be the sole beneficiary as it is the only market allowed for such investment initially. Under the rules, mainland banks can buy equity funds and structured products in Hong Kong and pick investment managers authorised by the Securities and Futures Commission, the only entity with a memorandum of understanding on wealth management with the China Banking Regulatory Commission. The minimum subscription of such a QDII product is 300,000 yuan, a requirement analysts said could attract more well-educated and sophisticated mainland investors. 'I think they will be more willing to put their savings into more fairly valued overseas equities instead of the crazy A-share market,' said Steven Sun, HSBC regional equity strategist. H-shares and other China-related stocks are expected be snapped up by banks with QDII quotas.
