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Expansion of offshore wealth-management services by banks on the Mainland The expansion facilitates an orderly outflow of funds from the Mainland. On 26 April I wrote about the possible expansion in the scope of investment for Mainland banks engaging in wealth management for Mainland investors under what are now commonly called QDII schemes. Last week the good news came in the form of a circular issued to banks by the China Banking Regulatory Commission (CBRC). While the immediate reaction of many people in Hong Kong focussed on the impact of the decision on the A-share market on the Mainland and the H-share market in Hong Kong, I wish to point out that the decision has longer-term, strategic significance on three fronts. First, the expansion of the investment scope to include equity opens up a new channel for the orderly outflow of funds from the Mainland. We are all aware of the pressures the Mainland is facing on the monetary front. There has been a strong inflow of funds, exerting considerable upward pressure on the exchange rate of the renminbi. While theoretically an adjustment of the exchange rate could reduce the size of the balance-of-payments surplus and therefore the inflow of funds, the low sensitivity of the balance of international payments to exchange-rate changes means that large exchange-rate changes are required to produce a significant impact. The fact that the balance-of-payments surplus has increased since July 2005 when flexibility was introduced to the renminbi exchange rate demonstrates this clearly. The appropriate step now is therefore to further relax the controls on the capital account to facilitate the orderly outflow of funds, and the decision by the CBRC should have this desirable effect. Hopefully the outflow will be large enough to make an impact, relieving some of the pressures on the exchange rate and on monetary management. Secondly, the CBRC's decision allows investors on the Mainland to invest some of their enormous savings overseas. Domestic savings on the Mainland have been trapped in the banking system for a long time, earning a meagre return that does not encourage consumption. The development of the capital market on the Mainland has led to a welcome diversification of investment opportunities, and this has been met by an enormous surge in investment demand that has pushed prices to levels beyond expectations. However, the risk-return profile of the equity market on the Mainland may now be too rich for the appetite of some investors on the Mainland. They will welcome the opportunity to invest in the Hong Kong equity market, whether in H-shares or in the whole spectrum of listed shares, despite the exchange-rate effect (which should be relatively small) they need to take into account. More important is that the decision will encourage more sensible and healthy development of the capital market on the Mainland. Thirdly, the expansion will help mitigate the current situation of market segregation, whereby, for an increasing number of shares, the supply and demand in the domestic Mainland market cannot interact with the international Hong Kong market. While the situation is understandable given the necessary exchange controls on the Mainland, it is still not healthy and should be addressed in an orderly way before the market springs a surprise on everyone. The objective should be to allow domestic supply and demand on Mainland to interact with international supply and demand in Hong Kong: this will make the market deeper and wider, increase its liquidity, make price discovery more efficient, and make the market more structurally stable. The decision by the CBRC can be seen as a move in this direction, if financial institutions in Hong Kong and commercial banks on the Mainland can provide investors with financial products that take advantage of the significant price differentials between the two markets for the same product. There is also a need to provide investors on the Mainland with good market analysis and information. I am sure the private sector is very good at that. Some are concerned about the limitations arising from the QDII quota, the 50% limit for the equity component of a QDII product, and the 5% limit for individual shares. Let us tackle these when they become restrictive. They may well be relaxed later to allow an orderly outflow of funds, for monetary and exchange rate management and other reasons. It is more important for us to appreciate what the Mainland authorities are trying to achieve and the role the financial system of Hong Kong can play in helping to bring it about. Joseph Yam ¡@ Click here for previous articles in this column. ¡@ |
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