The Hong Kong market is one of the world's most responsive and resilient.  It has established itself as a financial centre for China business to raise funds publicly.   There are more than 87 investment banks in the city and more are sending their best to Asia to earn the credentials to become global leaders.  

China allows nationals to buy Hong Kong shares
New SAFE regulations will turbo-charge Hong Kong H-shares

News that Chinese nationals will be able to buy and sell foreign shares privately caused a sensation in Hong Kong on Monday – and commentators estimate the reaction is justified.

Under the new regulations, Chinese nationals will no longer be limited to the former ceiling of $50,000 in forex acquisitions per year. They will be able to use their existing forex, or buy the foreign exchange with renminbi, apparently with no ceiling on the amount they can send abroad.

“The new rules come at a good time. Many people in China believe the A-share market is overvalued, as is domestic real estate. People are also worried about inflation and low interest rates. So there will be appetite for investing overseas,” says one Chinese banker in Beijing.

However, the same source estimates that there will not be a huge outflow of funds in the near term. “Basically, this is legalising what has been going on for years. Chinese companies with branches in Hong Kong have long funnelled money out of China into Hong Kong. Individuals have also frequently brought suitcases full of cash across the border.”

The scheme, announced by China’s State Administration for Foreign Exchange on Monday, is experimental. No start date was provided in the press release.

Initially, investment will only be permitted into Hong Kong. And only nationals with a bank account at the Binhai New Zone in Tianjin will be able to participate. Binhai New Zone is part of Tianjin’s efforts to accelerate its growth rate after several years of underperforming other first-tier Chinese cities.

“This is part of a raft of reform measures in Binhai,” notes Zuo Xiaolei, head of research at Galaxy Securities in Beijing, adding that geographical restrictions in the early stage of a reform measure are common in China.

Macquarie Bank’s Paul Cavey, head of China research in Hong Kong, says the big draw will be Hong Kong’s H-shares. “H-shares will look cheap to domestic investors. Equalization of prices between Hong Kong and Shanghai is bound to happen, and that’s behind the huge spike in Hong Kong today.”

Citi confirmed in a research note that H-shares were, on average, 47% cheaper than A-shares on August 17.

While the move is great news for punters in Hong Kong, it’s less clear what the impact will be on China’s swollen foreign exchange reserves – a clear symptom, according to critics, of an undervalued currency. “China’s current account surplus is running at $20-$30 billion per month. It’s unlikely, at least in the near term, that the outflows from the scheme will match that figure, and bring the currency into equilibrium,” says Cavey.

On the contrary, further hot money flows into China might be the issue over the coming months, given the US Federal Reserve’s indication over the weekend that it might lower interest rates.

“Looser monetary policy (in the US) will do nothing to end the undervaluation of the renminbi, and by cutting the return on US dollar assets, could even make China's liquidity problems worse," says Cavey.

Ironically, there is a dearth of foreign currency in China, as forex accounts have been wound down to profit from renminbi appreciation and booming asset markets. According to Macquarie, forex funds account for just 3.6% of the total bank deposits. That is far less than the ratio five years ago, says Cavey.

Foreign currency outflows under the scheme will not directly affect the value of the renminbi, whose value against the US dollar is set by central bank fiat. “But any outflow of money has the potential to slow the build-up of foreign exchange reserves, removing one of the clearest signs of the undervaluation of the currency,” points out Cavey.

That might appease US critics of China’s bulging trade deficit with the country.

For Galaxy Securities’ Lei, the news was hardly surprising. “We recently had the ‘Qualified Domestic Institutional Investor’ scheme, permitting certain insurance companies and banks to invest abroad. Now, we have the same being applied to individuals. It’s just one more step towards the liberalisation of the capital account.”

Others are not quite so sure.

“China’s historical memory is that capital accounts saved China during the Asian financial crisis. It’s very difficult for China to get out of that mindset,” estimates Cavey. “They don’t want to make channels for money draining out of China too easy. Were sentiment on China ever to change, the consequences could be capital flight.”

A bonus of the measure is that any outflows would help deflate asset bubbles which have been building up in the real estate and stock market bubbles. Other measures introduced by the government have so failed to have much effect.

China’s second quarter growth this year was almost 12%, leading to overheating concerns.

The Hang Seng Index closed the day up 6% to 21,595.63 points on Monday, a gain of 6% and its best single-day percentage gain since 1998. But the discount window rate cut in the US also contributed to the euphoria.  
  - ASIA FINANCE     21 August 2007

Beijing may soon let people invest abroad 

China, holder of the world's largest foreign exchange reserves, is considering allowing individuals to invest directly overseas for the first time to ease pressure on its currency to appreciate, a regulator said.

'We are currently studying measures to allow individuals' outbound direct investments and securities investments, and we will further relax capital account controls related to individuals,' Deng Xianhong, deputy director of the State Administration of Foreign Exchange, said in an interview carried on the government's website yesterday.

Chinese individuals at present are permitted to invest abroad only through licensed funds run by banks and brokerages.

China's foreign exchange reserves have swelled to a record US$1.33 trillion, encouraging the government to loosen capital controls that are aimed at safeguarding financial stability.

Starting Feb 1, China made it easier for individuals to convert yuan into foreign currencies while tightening controls on short-term capital inflows. The government previously required each transaction to be approved by the currency regulator.

Record trade surpluses have driven up the nation's foreign exchange reserves. The yuan has gained about 9 per cent since the government scrapped a decade-old link to the US dollar in July 2005.

China has resisted pressure to let the yuan gain more rapidly out of concern that companies aren't ready for a more volatile currency and pricier exports would lead to job losses.

Foreign exchange purchases by Chinese individuals between February and June more than tripled from a year earlier after the relaxed rules took effect, Mr Deng said in the interview.

Mr Deng didn't provide a timetable for further policy changes, adding that a decision will depend on whether the regulator can effectively monitor and manage further relaxations.

Chinese individuals can currently invest foreign currency in domestic B-share markets that are denominated in Hong Kong dollars and US dollars. They can also buy overseas securities through investment portfolios offered by domestic banks, fund managers and brokerages under the qualified domestic institutional investor programme, Mr Deng said yesterday.

No direct outbound investment by individuals is allowed, he said. - Bloomberg   17 August 2007


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