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Offshore door opens to individual investors
By Ye Zhen |
March 11, 2013, Monday
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Print Edition
Print Edition
CHINA is planning to introduce a pilot project to give its citizens direct access to overseas capital markets, a step toward liberalizing the country's capital account and increasing the flow of yuan between stock markets in the mainland and Hong Kong.
The People's Bank of China said at its annual working conference for 2013 that it is drafting details for the so-called Qualified Domestic Individual Investors program as part of its efforts to promote cross-border trading in the yuan.
The pilot program, dubbed QDII2, will allow mainland individual investors to directly trade securities on overseas stock exchanges for the first time.
Under the existing Qualified Domestic Institutional Investors (QDII) program, begun in 2006, individual investors on the mainland were allowed to invest in offshore capital markets only through funds offered by approved commercial banks, fund managers or securities firms
Market watchers predict Hong Kong will be the first testing ground for the pilot project before China gradually expands it to other offshore markets.
"It's difficult for China to develop a complete trading system that enables its citizens to invest in all global markets because the yuan is not yet freely convertible and technical difficulties remain in terms of the opening of trading accounts and the repatriation of funds," Lin Jinghua, an analyst with Capital Securities Corp, said in an interview with business news agency ET Net.
"It would be easier to start with Hong Kong, where subsidiaries of mainland-based securities firms can facilitate the program," said Lin.
Actually, there is a precedent of sorts for the new trial program. It was called "Hong Kong Stock Through Train," but it never got on the tracks.
In August 2007, the State Administration of Foreign Exchange of China said it would run an experimental program in Tianjin, a coastal city near Beijing, to allow Chinese mainland individuals to buy Hong Kong stocks directly.
The Hang Seng Index in Hong Kong surged almost 60 percent in the three months following the announcement, as investors there anticipated a huge inflow of funds from the mainland.
The expectations were eventually dashed. The experimental program never materialized, and in 2010, the forex regulator said it had been scuttled. No reason was given.
Reviving hope
The emergence of QDII2, at least in concept, is once again reviving investor hopes in Hong Kong.
"Although several requirements may be set to select qualified domestic private investors in the initial stages, indicating that incremental liquidity from domestic funds may not be very significant at first, the Hong Kong market could still benefit from boosted market optimism," Guotai Junan Securities (Hong Kong) Ltd said in a report.
At the same time, some concerns have been raised that any moves to give individual investors more direct access to Hong Kong or other offshore markets might siphon funds from domestic stock markets.
Investment consultancy Z-Ben Advisors doesn't think that will be the case.
"The outflow of renminbi to Hong Kong is unlikely to affect the A-share market because private capital has already been flowing to overseas markets through other means," the firm said in a note to clients. "Additionally, H shares are not trading at a large discount to A-shares, being less attractive than they once were."
The Hang Seng A-H Premium Index, a gauge of the price premium of mainland-listed A shares to their corresponding H-Shares listed in Hong Kong, was at 100.5, a 0.5 percent premium, on Friday. That was down from the year high of 167.1 in 2009, after the A-share market suffered a three-year bearish trend.
Two-way flow
Guotai Junan Securities said undervalued class A shares in the banking, insurance and infrastructure sectors would benefit from stronger two-way flow of yuan funds between the mainland and Hong Kong.
"QDII2 could be considered another significant step in renminbi internationalization," the broker said. "We expect the same shares on the mainland and Hong Kong markets to gradually trade at an equal price, or at least the valuation difference to gradually narrow in the future."
At the same time, Hong Kong hosts a wider range of investment tools than available in the mainland, such as stock options and warrants. QDII2 could give mainland investors access to more financial products and enable them to spread risk and improve the effectiveness of asset allocation, according to Tan Fei, analyst with Shenyin & Wanguo Securities Co. But some analysts cautioned that there are also risks.
Lu Zhengwei, chief economist with the Industrial Bank, said the timing is not right to launch the pilot project, especially if Hong Kong is to be used as the first testing ground.
"Hong Kong's stock market has gained a lot since 2009 because of the booming economy of the Chinese mainland and easing monetary policies in the US," Lu said. "Currently, it has little room left to rise. The economic recovery on the mainland remains flabby, and the US Federal Reserve is considering an early end to its bond-buying stimulus."
He added, "It would be unwise to open the Hong Kong market to mainland individual investors at this time, especially considering that they are generally less skilled in risk management."
Chinese regulators are expected to take risk into consideration.
Xiang Songzuo, chief economist at Agricultural Bank of China, said only individuals with a certain scale of liquid assets may qualify for the new program. He suggested that the asset threshold could be US$5 million or US$10 million.
"Applications would also need to be of good reputation, with long-term investment experience and the ability to bear risks," Yuan Junping, managing director of Guotai Junan Assets (Asia), was quoted as saying in Hong Kong's Standard newspaper.
The People's Bank of China said at its annual working conference for 2013 that it is drafting details for the so-called Qualified Domestic Individual Investors program as part of its efforts to promote cross-border trading in the yuan.
The pilot program, dubbed QDII2, will allow mainland individual investors to directly trade securities on overseas stock exchanges for the first time.
Under the existing Qualified Domestic Institutional Investors (QDII) program, begun in 2006, individual investors on the mainland were allowed to invest in offshore capital markets only through funds offered by approved commercial banks, fund managers or securities firms
Market watchers predict Hong Kong will be the first testing ground for the pilot project before China gradually expands it to other offshore markets.
"It's difficult for China to develop a complete trading system that enables its citizens to invest in all global markets because the yuan is not yet freely convertible and technical difficulties remain in terms of the opening of trading accounts and the repatriation of funds," Lin Jinghua, an analyst with Capital Securities Corp, said in an interview with business news agency ET Net.
"It would be easier to start with Hong Kong, where subsidiaries of mainland-based securities firms can facilitate the program," said Lin.
Actually, there is a precedent of sorts for the new trial program. It was called "Hong Kong Stock Through Train," but it never got on the tracks.
In August 2007, the State Administration of Foreign Exchange of China said it would run an experimental program in Tianjin, a coastal city near Beijing, to allow Chinese mainland individuals to buy Hong Kong stocks directly.
The Hang Seng Index in Hong Kong surged almost 60 percent in the three months following the announcement, as investors there anticipated a huge inflow of funds from the mainland.
The expectations were eventually dashed. The experimental program never materialized, and in 2010, the forex regulator said it had been scuttled. No reason was given.
Reviving hope
The emergence of QDII2, at least in concept, is once again reviving investor hopes in Hong Kong.
"Although several requirements may be set to select qualified domestic private investors in the initial stages, indicating that incremental liquidity from domestic funds may not be very significant at first, the Hong Kong market could still benefit from boosted market optimism," Guotai Junan Securities (Hong Kong) Ltd said in a report.
At the same time, some concerns have been raised that any moves to give individual investors more direct access to Hong Kong or other offshore markets might siphon funds from domestic stock markets.
Investment consultancy Z-Ben Advisors doesn't think that will be the case.
"The outflow of renminbi to Hong Kong is unlikely to affect the A-share market because private capital has already been flowing to overseas markets through other means," the firm said in a note to clients. "Additionally, H shares are not trading at a large discount to A-shares, being less attractive than they once were."
The Hang Seng A-H Premium Index, a gauge of the price premium of mainland-listed A shares to their corresponding H-Shares listed in Hong Kong, was at 100.5, a 0.5 percent premium, on Friday. That was down from the year high of 167.1 in 2009, after the A-share market suffered a three-year bearish trend.
Two-way flow
Guotai Junan Securities said undervalued class A shares in the banking, insurance and infrastructure sectors would benefit from stronger two-way flow of yuan funds between the mainland and Hong Kong.
"QDII2 could be considered another significant step in renminbi internationalization," the broker said. "We expect the same shares on the mainland and Hong Kong markets to gradually trade at an equal price, or at least the valuation difference to gradually narrow in the future."
At the same time, Hong Kong hosts a wider range of investment tools than available in the mainland, such as stock options and warrants. QDII2 could give mainland investors access to more financial products and enable them to spread risk and improve the effectiveness of asset allocation, according to Tan Fei, analyst with Shenyin & Wanguo Securities Co. But some analysts cautioned that there are also risks.
Lu Zhengwei, chief economist with the Industrial Bank, said the timing is not right to launch the pilot project, especially if Hong Kong is to be used as the first testing ground.
"Hong Kong's stock market has gained a lot since 2009 because of the booming economy of the Chinese mainland and easing monetary policies in the US," Lu said. "Currently, it has little room left to rise. The economic recovery on the mainland remains flabby, and the US Federal Reserve is considering an early end to its bond-buying stimulus."
He added, "It would be unwise to open the Hong Kong market to mainland individual investors at this time, especially considering that they are generally less skilled in risk management."
Chinese regulators are expected to take risk into consideration.
Xiang Songzuo, chief economist at Agricultural Bank of China, said only individuals with a certain scale of liquid assets may qualify for the new program. He suggested that the asset threshold could be US$5 million or US$10 million.
"Applications would also need to be of good reputation, with long-term investment experience and the ability to bear risks," Yuan Junping, managing director of Guotai Junan Assets (Asia), was quoted as saying in Hong Kong's Standard newspaper.
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