Sunday, September 23, 2007

Just A Minute

The recent announcement that Chinese from the mainland will be able to invest directly in all stocks listed on HKSE brought some euphoria. The plan was supposed to start with Tianjin, but somehow Beijing got scared due to the overwhelming positive reaction to the news. Now they have tweaked the program. Short term, HK's market may weaken today but should rebound by end of the day. There will now be a limit on the amount of money that can be put on board the investment "direct train". Some of the more bullish strategists thought that some 800 billion yuan (HK$829 billion / US$106 billion) or more could pour into Hong Kong through the pilot program. They will have to scale that down considerably.

Although there will be no limit on how much any individual can invest, there will be "tight controls" on the total amount invested through the scheme, China Banking Regulatory Commission chairman Liu Mingkang told the Financial Times. Liu did not say what level the quota would be set at. Mainland regulators are worried about controlling the risk for mainland investors. Rather than seeing the negative side of things, I think they are just taking incremental steps to implement the scheme, to ensure that any risk will be at a manageable level. The earlier announcement created very bullish waves in HK, which surprised Beijing. I think the scheme will develop and grow as there is a dire shortage of good investments for the excessive liquidity in Shanghai and Shenzhen.

Some analysts thought the newly- announced cap reflected internal conflicts within the government about whether the "direct train" pilot scheme would prove too popular, weakening other methods for channeling funds outside the mainland like the Qualified Domestic Institutional Investor scheme.

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