KONG STOCK MARKET
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
allows nationals to buy Hong Kong shares
SAFE regulations will turbo-charge Hong Kong H-shares
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
“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
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
China’s second quarter growth this year was almost 12%, leading to
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.
FINANCE 21 August 2007
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