The scheme helps promote the orderly outflow of funds from the Mainland and maintain financial stability in Hong Kong and beyond.
Readers will appreciate the excitement of those of us in the HKMA, who have been working on the development of the "mutually assisting, complementary and interactive relationship" between the financial systems on the Mainland and Hong Kong, at the recent announcement by the State Administration of Foreign Exchange of the pilot scheme to allow Mainland residents to invest individually in securities listed on the Hong Kong Stock Exchange. This is another significant step in the liberalisation of outward investment by Mainland residents, following the various Qualified Domestic Institutional Investor Schemes introduced earlier. While there are good reasons, having regard to the financial conditions on the Mainland, to introduce the scheme quickly, its extensiveness and the speed with which the Mainland authorities made the decision actually came as a pleasant surprise.
In our discussions with the Mainland authorities on this matter, we advocated, as noted several times in this column, speeding up the liberalisation of the capital account of the Mainland. Readers might remember me writing about a "free walk"（自由行）for investors on the Mainland with foreign exchange along with the "free walk" for tourists (the Individual Visit Scheme) in another Viewpoint article on 5 October 2006. We believe liberalising the capital account of the Mainland will encourage the orderly outflow of capital, which will go some way to relieving the upward (market as well as political) pressure on the exchange rate, noting also that a large appreciation in the exchange rate could entail risks to financial stability while having only a small impact on the balance-of-payments surplus. Outward investment by Mainland residents should also allow them to enjoy a more stable, risk-adjusted rate of investment return, which will in time encourage domestic consumption, increase imports, reduce the balance-of-payments surplus and achieve more balanced and sustainable growth. Readers will notice that these arguments have been articulated in Chapter 3 of the Report of the Focus Group on Financial Services published at the beginning of this year.
On channelling investment funds of Mainland residents to Hong Kong, we have been putting the question why foreign currencies, including Hong Kong dollars, owned by residents on the Mainland have to be booked on the Mainland as bank deposits, earning rather low rates of interest. There seemed to be no convincing reason why the investors should not be allowed to remit those funds outside the Mainland and take advantage of the investment opportunities available in, for example, Hong Kong. The well established investor-protection mechanisms in Hong Kong should alleviate any concerns on that score. In any case, liberalisation on this front could start by focussing on the large, and presumably sophisticated, investors, who should normally be able to protect themselves. And so we proposed recommendations 11 and 44 in the Report of the Focus Group, and followed up with detailed proposals, mindful of the need, as often emphasised by Mainland officials including Premier Wen, to proceed gradually, pro-actively and with a prudent degree of controllability in financial liberalisation.
All has now come to fruition and we look forward to a successful pilot scheme. The desire for controllability has led to the scheme being routed through a single channel on the Mainland, the Bank of China in Tianjin, although all Mainland residents are allowed access through this channel to the stock market in Hong Kong. This is more restrictive than what we had in mind, which is free remittance of foreign currencies by Mainland residents to bank accounts in Hong Kong subject to guidelines laid down on the Mainland on how to handle the money. But the present arrangement does not necessarily rule out a move towards freer arrangements in the fullness of time.
I am sure all concerned will watch the development of this scheme with keen interest. Whether or not the scheme will generate a significant increase in demand for foreign currencies and a relief of market pressures for the exchange rate to appreciate remains to be seen. And let us not forget that these are the most important objectives, although one should not play down the significant benefits the scheme will bring to the maintenance of the status of Hong Kong as an international financial centre. Let us also not ignore the contributions the scheme is making to financial stability in Hong Kong and beyond, coming at a time of great volatility and nervousness in global finance. The timing was perfect, coming immediately after the huge market yo-yo we saw on Friday 17 August and the 50-basis-point cut in the discount rate by the Federal Reserve. This may just turn out to be the move that tranquillises global financial markets. China matters in global finance, more than many people think.
Joseph Yam
23 August 2007
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