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China's commercial banks will soon be able to invest in overseas stocks with funds managed on behalf of their clients.

The China Banking Regulatory Commission (CBRC) gave the official go-ahead on Friday to allow commercial banks, holding the qualified domestic institutional investor certificates, or QDIIs, to issue wealth management products that invest in overseas stocks.

A bank will be allowed to invest no more than 50 percent of a single wealth management product in foreign stocks. Banks are also barred from investing more than 5 percent of a wealth management product in a single stock, the financial regulator said in a rule posted on its website on Friday.

Banks are also forbidden from using their own money in such investments, the financial regulator said.

"The expansion of the investment scope of the QDII scheme will be a win-win measure that will benefit both the mainland and Hong Kong financial markets," said Joseph Yam, Hong Kong Monetary Authority's chief executive .

"The move will certainly meet the mainlanders' growing appetite for overseas investments," said Lai Wai-shing, an independent stock analyst. "Hong Kong, meanwhile, will receive a boost as a regional financial center."

QDIIs will likely first be made available to Hong Kong-listed equity funds, which currently number more than 2,000.

QDII operators on the mainland are inexperienced with overseas equity investment, making equity funds a good starting point for QDII expansion, Lai said.

Strong interest is also expected in mainland shares listed in Hong Kong. Because of the A-share market surge, H shares also listed on the mainland are selling at a comparative discount.

QDII expansion will be gradual, said Ronald Wan Ten-lap, managing director and head of investment banking at Bank of Communications Securities.

"The fanatic A-share rally will keep the mainland capital from flowing out too quickly," he said.

Though H shares will probably close their price gap with A shares, "it's unlikely to move the Hong Kong market as a whole", Wan said.

The Chinese government launched the QDII program last April to allow commercial banks and fund management firms to make overseas investment on behalf of their clients. The program is expected to reduce foreign exchange reserve pressures.

The response has been poor so far - just 3 percent of the $13 billion in QDII quotas have been used.

This is largely because banks are allowed to invest in fixed-income or money market products, but not equities. With the yuan growing in value against greenback and the soaring A-share market, the limited returns offered by QDII products lack appeal.

(China Daily 05/12/2007 page10) 

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