Global gateway opens for Chinese investors

PRIVATE investors on China's mainland will soon be able to trade Hong Kong shares directly via domestic accounts, the currency regulator said yesterday.

The move is seen as a stepping stone in the globalization of corporate China and its citizens.

The State Administration of Foreign Exchange has approved a pilot program to allow direct overseas stock investments by individuals in a move to push forward its foreign-exchange reform and ease mounting forex reserves, according to a statement on its Website.

Domestic individuals can invest their foreign currency on the Hong Kong market by setting up an account with Bank of China Ltd in Tianjin's Binhai economic zone.

Investors can either use their own foreign currency or convert yuan into foreign currency.

The amount of foreign-exchange purchases can go beyond the US$50,000 annual limit set by the regulator, according to the statement. The administration, however, didn't specify when the rules take effect.

"Although there are limits, this is a historic move in China's capital-account opening," said Stephen Green, a senior economist at Standard Chartered Bank (China) Ltd.

The announcement came after administration deputy head Deng Xianhong's remarks last week that the government is studying a series of reforms in personal direct investments and securities investments overseas. Chinese mainland residents at present are permitted to invest overseas only through licensed qualified domestic institutional investment funds run by banks, brokerages, funds and insurers.

China introduced the QDII program in July last year to channel part of its mounting foreign exchange reserves and ease the flow of cash into the stock market. The combined quota thus far exceeds US$20 billion.

The country's foreign-exchange reserves swelled to a record US$1.33 trillion by the end of June, remaining the world's largest.

"Lifting restrictions on individual overseas investment will boost returns on Chinese residents' foreign-exchange holdings, broaden channels for currency outflows and balance the country's international payments," the regulator said in the statement.

The forex regulator raised the annual quota on foreign-exchange transactions by private citizens to US$50,000 from the previous US$20,000 in February.

Zhang Qi, an analyst at Haitong Securities Co, said the move - bullish sentiment hitting H-shares - may dampen the yuan-backed A-share market by channeling capital flow to the Hong Kong market.

The huge gains in domestic shares may also lure investors to switch money to overseas markets to hedge their bets.

"This move should be the beginning of a major shift in merging A- and H-share prices," said Green.