China's securities brokerages and fund managers will be allowed to invest in overseas stocks and bonds for the first time as Beijing looks to reduce soaring foreign exchange reserves and provide alternative investments for its citizens.
The China Securities Regulatory Commission issued new regulations on Thursday allowing the country's 110-odd securities firms and 57 fund management companies to apply for qualified domestic institutional investor (QDII) quotas to invest in offshore securities.
Fund managers had about $138bn under management by the end of the first quarter, while securities firms had $84bn under management at the end of 2006. Until now, only one fund manager, Shanghai-based Hua-an, had been allowed to invest overseas, alongside 18 banks and three large insurers, under a pilot programme begun last year.
Beijing has handed out nearly $19bn of QDII quotas to these institutions but just a fraction has been used, because its policy of slow but steady currency appreciation makes offshore investment unattractive.
By expanding the programme the government expects to generate much greater enthusiasm among investors, eager to trade shares in Chinese companies listed in Hong Kong, whose shares are roughly twice as expensive on the mainland. Such a price discrepancy is a result of China's rigid capital controls and a lack of investment options on the mainland, which has contributed to the Chinese stock market frenzy and quadrupling of valuations in the past two years.
"There is a very good case for arbitrage between Hong Kong and mainland-listed shares right now so this is a very good time to sell funds based on overseas stocks," said Qu Hongbin, chief China economist at HSBC.
Hong Kong's HSCEI Index, which covers mainland companies listed in the territory, rose 2.5 per cent yesterday on news of the regulatory change.
So-called "H-share" companies listed in Hong Kong are expected to be the biggest beneficiaries of the QDII scheme because they are already familiar to mainland fund managers.
A Beijing-based fund manager said all China's biggest and best fund companies had already prepared their QDII products and were just waiting for licences to be issued. "The bigger the quota we can get, the better," the manager said.
The expansion of QDII is another step towards opening China's closed capital account and is aimed at recycling some of its massive and rapidly growing foreign exchange reserves
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