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QDII programme to be tested
(China Business Weekly)
Updated: 2004-06-20 09:56

China - trying to further integrate itself into the global economy and balance its foreign exchange inflow and outflow -may implement its QDII scheme faster than planned, experts said.

Analysts expect the QDII (qualified domestic institutional investor) scheme will be launched before year's end, as China's banking, foreign exchange and insurance regulators have publicly hinted as much.

The QDII scheme will allow Chinese citizens to invest in overseas equities markets, with designated foreign currencies, through qualified institutional investors, such as fund management companies.

"Introduction of QDII is inevitable for China, because China cannot always use administrative methods to bar the flow of capital as the nation tries to integrate itself into the global economy," Han Yi, an analyst with Centergates Securities Co Ltd, told China Business Weekly.

QDII could help China quickly link its financial market to the world, especially as China still imposes foreign exchange controls, Han said.

China's rising foreign exchange reserves and international pressure on China to revalue the renminbi are other factors pushing the country to implement QDII, experts said.

"Although the initial size of the QDII scheme will likely be small when compared with China's US$400-billion forex reserves, it will have a long-term influence on reducing China's forex reserves," Yi Xianrong, an economist with the Chinese Academy of Social Sciences' Institute of Financial Research, told China Business Weekly.

"Such a milestone move could prove China, for the first time, would allow individuals and companies to invest overseas through official channels. As long as the first step is successful, it will be easier to make further moves.

"And that could be a historical step taken by China to improve its forex control mechanism and change people's anticipation about the forex reserves' growth and the renminbi's value."

China's foreign exchange reserves surged 40 per cent, year-on-year, to reach US$403.3 billion at the end of last year, indicate the State Administration of Foreign Exchange (SAFE) statistics.

The international community has applied greater pressure on China to revalue the renminbi as the nation's forex reserves have increased.

China, since last year, has been under mounting pressure, especially from the United States and Japan, to appreciate the renminbi.

The renminbi, also called the yuan, has been virtually pegged to the US dollar, under a managed, floating regime, since 1994.

Speculative funds, anticipating a higher yuan, may flow in and further increase China's forex reserves.

"Moreover, China, given the fact it has implemented the QFII scheme, cannot always bar the outflow of money to overseas capital markets," Han said.

"They are opposite sides of a coin, and they should act as a buffer for the flow of money in and out of China.

"When you hold a coin in your hand, you have both sides of it."

China last year approved the qualified foreign institutional investor (QFII) system, which allows foreign investments into the nation's A-share and bond markets.

A QDII arrangement could divert the growing reservoir of foreign exchanges into a variety of investment alternatives, experts said.

Chinese mainland citizens holding foreign currencies have limited investment choices. They can invest in the B-share market or put the money in bank accounts for either forex trading or the accumulation of low interest.

Since the B-share market is regarded by many as speculative and lacking quality companies, many people choose the latter option.

Alternative investment options in more efficient and advanced markets should be appealing to mainland investors, experts said.

"Another fact the Chinese authorities must face is some investors have put money into overseas markets through unofficial channels, such as underground banks, which are very risky," Han said.

"Introduction of QDII could guide the capital outflow into official channels, which could make it easier for the authorities to better govern the capital outflow and to avoid financial risks," Han said.

The QDII scheme was first proposed by the Hong Kong Special Administrative Region's government in 2001 as a way of boosting the region's economy.

Hong Kong's stock market is expected to be the testing ground for the scheme, analysts predicted.

The QDII rules, which allow the outflow of China's foreign exchanges, will be drafted by the China Securities Regulatory Commission, the National Development and Reform Commission, the Ministry of Finance (MOF), the People's Bank of China, SAFE, China Insurance Regulatory Commission (CIRC) and China Banking Regulatory Commission.

The State Council in March approved MOF's proposal to allow the social security fund to invest overseas, with Hong Kong as the preferred target market.

The National Council for Social Security Fund is the first domestic institution to receive approval to invest overseas.

But authorities are still working on the specific framework to implement the plan.

Chinese insurance companies, keen to achieve favourable returns on their premiums, may be next, experts said.

Li Kemu, CIRC's vice-chairman, at the end of last month said regulations to allow insurance companies to invest overseas could hopefully be ready by year's end.

Some Chinese fund management companies, such as Fortune SGAM Fund Management Co Ltd, are also keen to participate in QDII.

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