Analysts expect the widening of the investment scope for the mainland's qualified domestic institutional investors (QDIIs) will boost Hong Kong's equity market as long as the mainland regulator continues to widen the quota of investment.
They forecast that half the amount of the granted quotas of US$10 billion will be used by the end of the year.
On May 11, the China Banking Regulatory Commission (CBRC) announced that it's extending the spectrum of QDII products to overseas stocks.
The news sparked Hong Kong's Hang Seng Index to soar 511 point last Monday to 20,979, while the daily turnover hit an all-time high of HK$95 billion. But the rally ran out of steam and the index fell 111 points the next day.
"QDIIs haven't done a great job in the past as the products were only allowed to invest in fixed-return tools," said Daniel Chan, DBS Bank (Hong Kong) senior investment strategist. He attributed the lukewarm response of QDIIs to the products' low returns.
"As the spectrum of QDII products extend to equities, the average return could be at least at 8 percent. We expect commercial banks to be more eager to apply for the new quotas. Overall, how far Hong Kong's equity market will be driven by QDIIs depends on whether the central government will further relax the QDII quota," said Chan.
For the mainland, Chan said, more relaxation could help channel excess liquidity and reduce foreign reserve pressure.
Tai Hui, an economist with Standard Chartered Bank, said QDIIs are expected to generate little impetus for the Hong Kong market.
"With the frenzy in the equity market, QDIIs look less attractive to woo mainland investors to divert their money to Hong Kong," he said.
"The Hong Kong market can benefit only if the banking regulator widens the quota and spectrum of QDIIs, but we're also aware some of the money might flow to other overseas markets rather than Hong Kong, the US for example."
A Standard Chartered report stated: "Given the high market capitalization of the A-share market, the State Administration of Foreign Exchange might loosen (the curbs on) exodus of capital via QDIIs. Also, the price discrepancy between A and H shares will lure more domestic money into the H-share market."
The report forecast that US$10 billion of the overall US$18.5 billion of the QDII quota would be used by commercial banks this year.
UBS Investment Research Director Eric Wong pointed out that the new round of QDII quota expansion would have a positive effect on Hong Kong's property market.
"As the quota keeps widening, it'll suck more overseas capital into Hong Kong. With the QDII impetus, more multinationals will set up their branches in Hong Kong. We expect developers to try increase their land reserves in anticipation of the influx of foreign capital," he said.
CBRC gave an official go-ahead this month to allow commercial banks with QDII qualifications to issue wealth management products investible in overseas stocks.
A bank will be allowed to invest no more than 50 percent of a single wealth management product in foreign stocks.
However, banks can neither pour more than 5 percent of a wealth management product into a single stock, nor use their own money in such investment.
(China Daily May 24, 2007)