Lau Nai-keung
Since the QDII (qualified domestic institutional investor) plan
launching last July, it has not been very popular in its test
market, Hong Kong.
The QDII plan will allow Chinese citizens to invest in overseas
equities markets with designated foreign currencies. QDII works
through qualified institutional investors such as fund management
companies.
A quota of US$12.6 billion has been allotted for the operation,
but only US$300 million, or 2.4 percent, has been utilized.
Obviously, when the domestic stock market is like a crazy bull and
nobody cares about risks, who will bother with the seemingly low
yielding overseas market.
But things may be about to change. The number of players in
China's stock market is now rapidly approaching 100 million, and
the banks are still flooded with liquidity. The bubble is about to
burst, and decision-makers have to do something fast.
QDII is an obvious candidate on the short list of possible
measures. If successful, it has the advantage of killing three
birds at the same time: curbing the surplus of savings and foreign
exchange and cooling the yuan-denominated A-share stock market.
Another advantage, the plan is already in place. The machinery
is now moving smoothly along after a year's experience in
establishing, operating and refining the system.
This will be the fastest measure to be implemented since all it
takes is some relaxation fine tuning. It is also safer because it
is highly regulated and orderly. Any possible troubles will take
place in Hong Kong, where there is a firewall separating the
mainland.
In a nutshell, this is the background of the new development in
QDII in mid-May, when the China Banking Regulatory Commission
(CBRC) announced its decision to widen the scope of investment
under the QDII scheme. Mainland commercial banks offering overseas
wealth-management business are allowed to invest in a wider range
of asset classes, including equities and equity funds authorized by
a supervisory authority with whom the CBRC has a memorandum of
understanding (MOU).
Where an overseas intermediary is appointed as investment
manager, it must also be regulated by a supervisory authority which
has an MOU with the CBRC. As the first and the only authority to
sign a MOU with the CBRC, the Hong Kong market and Hong
Kong-authorized and regulated financial products and intermediaries
are now given a head start to implement it.
Now that the funds can invest in the stock market and equity
funds, Hong Kong, the fourth biggest stock market in the world with
the highest concentration of mainland listed companies, clearly
stands to gain in the revised scheme. Needless to say, with this
psychological boost, the Heng Sang Index has been heading northward
ever since.
China's foreign exchange surplus is already high and its growth
remains unabated. There is increasing current-account surplus,
continued strong capital inflow, rapid accumulation of foreign
reserves and increasing difficulty in monetary management. This all
leads to inflationary pressure and financial instability. This has
also put the country in a very awkward position, with constant
international pressure for RMB revaluation.
China cannot always use administrative measures to bar the flow
of capital as the nation tries to integrate itself into the global
economy. And it has no intention of artificially slowing its
exports. China must come up with ways and means to spend these
accumulating foreign currencies in the market fast.
QDII can help China quickly link its financial market to the
world, especially as China still imposes foreign exchange controls.
These new measures will facilitate the orderly outflow of funds
from the mainland and fully utilize Hong Kong's position as an
international financial center.
The implementation of QDII in Hong Kong can be seen as one of
the classic examples of how best to utilize Hong Kong's advantages
for the mutual benefit of both the mainland and Hong Kong.
However, if we put too much hope in the revised QDII plan, we
might be in for another disappointment. It now looks as if we will
call ourselves lucky to quickly consume the existing US$12.6
billion quota. But this solves only a small portion of the
problem.
After all, how long will it take for the QDII system to digest
this sizable amount is still a question. One thing is certain, QDII
alone cannot save the day for the country's foreign exchange
predicament.
On the other side of the coin, QDII will be a possible source, a
very big one for that matter, of investment funds for Hong Kong.
But whether the money will actually be invested in the Hong Kong
equities market will depend on many factors.
Currently numerous commentators put a lot of emphasis on the
price differential between mainland A-shares and Hong Kong
H-shares. But that margin will seem small compared with the
possibly huge short-term windfall that could be made in the
mainland market.
On top of that, there is currency exchange risk investing
outside the mainland when all eyes are still on China to appreciate
the RMB. On the whole, the Hong Kong equities market is very
narrow, concentrating only on stocks and warrants.
Should the US$12.6 billion be thrown into the Hong Kong stock
market within a short period, it will certainly create a bubble
there. And when the bubble bursts, a lot of investors, including
many mainlanders channeled through QDII, will get hurt.
On the whole, the revised scheme poses great challenges to the
skill and professionalism of the fund managers and the supervisory
capability of the Hong Kong financial sector, which is now being
put under great strain.
The author, from Hong Kong, is a member of the National
Committee of the Chinese People's Political Consultative
Conference
(China Daily May 21, 2007)