By Mike Caggeso
Associate Editor
Hong Kong and Chinese officials are one-step closer to allowing direct investments from mainland traders, as a new proposal sent yesterday (Thursday) awaits approval from the mainland China cabinet.
If approved, legions of investors are expected to stampede Hong Kong's stock market. And that is the safety issues officials are working out.
On Aug. 20, The State Administration for Foreign Exchange announced the "through train" pilot program for mainland investors to trade Hong Kong stocks through the Tianjin branches of the Bank of China.
However, the program has been delayed because of potential risks, mainly investor safety and China's concern that the anticipated large capital flows would disrupt its own market.
Joseph Yam, chief executive of the Hong Kong Monetary Authority, said China needs to boost securities transactions and cement cooperation between financial intermediaries, Bloomberg News reported.
"China needs more domestic funds to flow overseas in order to seek higher returns," Yam said yesterday. "But opening the capital account will not be simple and will require coordination between foreign exchange regulators. I hope to see these issues smoothed out as soon as possible."
One possible measure is an imposed $30 billion investment ceiling for the pilot program, a Nov.12 report from Credit Suisse Group (CS) suggested. The report also said the through-train program will be delayed until the second quarter of 2008, which sent Hong Kong stocks to a one-month low.
That incidence, again, highlighted the government's safety concerns. Not only will a flawed plan pull billions from mainland markets - deflating China's growth - but it could also spook investors, who would view Hong Kong's red-hot market as more of a gambling casino, and then turn away.
"These are risks that can be managed, and managed effectively," Yam said.
And that's something the government can take comfort in. Investors, however, just want in on the action.
News and Related Story Links:
- Bloomberg News:
Hong Kong Submits Proposal for China-H.K. Stock Plan. - Wikipedia:
Hong Kong Monetary Authority. - Money Morning Investment Analysis:
Record Surge of China ETF Speaks to Risk and Opportunity of Chinese Market