Expansion of QDII schemes

inSight

26 Apr 2007

Expansion of QDII schemes

The proposed expansion will make it easier to use Hong Kong's financial system to improve financial intermediation on the Mainland.

We were glad to hear from the Chairman of the China Banking Regulatory Commission (CBRC) Mr Liu Mingkang earlier this month that the CBRC was considering a possible expansion in the scope of investment for Mainland banks engaging in wealth management for Mainland investors under what are now commonly referred to as QDII schemes. We certainly hope that the expansion will bring more business to financial intermediaries and activity to the financial markets of Hong Kong, further strengthening its status as an international financial centre. We await with keen interest the details to be announced, as mentioned by Chairman Liu when he was in Hong Kong, "shortly".

Readers who have been following financial developments on the Mainland closely will have noticed the important and consistent policy messages, first in the 11th Five-Year Plan announced in March 2006 and more recently in the statements following the National Finance Working Meeting in January this year. Interested parties here in Hong Kong should study these documents in great detail if we are to position ourselves to contribute to financial reform and liberalisation on the Mainland and take advantage of the many business opportunities to be opened up.

I would like to draw readers' attention to the increasing emphasis I detected in these documents on foreign exchange management. This is understandable, given the persistent and increasing current-account surplus, continued strong capital inflow, rapid accumulation of foreign reserves and increasing difficulty of monetary management. This scenario has profound implications for the economy, in terms of, for example, inflationary pressures, financial stability and the sustainability of the rapid economic growth that is so important for the modernisation of China.

The emphasis on foreign exchange management is articulated in four areas: pressing ahead with reform, encouraging the outflow of funds, strengthening regulation, and developing techniques. These may sound like empty slogans to some in Hong Kong, where we have no exchange controls and the highest degree of freedom of capital mobility, but for the Mainland these are important initiatives. Indeed, I am sure those familiar with financial developments on the Mainland will agree that the best way for the Mainland to address the scenario described earlier is to further liberalise the capital account, rather than to allow a large appreciation in the exchange rate. In accordance with the spirit of "gradualism", "controllability" and "pro-activity" in reform, capital account liberalisation should be effected through encouraging outflow under a framework of effective regulation.

There are more details in the policy statements, such as "the further widening of outward investment channels to direct the orderly outflow of capital", "the gradual relaxation of the restrictions over the scale and variety of outward financial investments by institutions and individuals" and "the further improvement of exchange controls over outward direct investments and the continuous support of state-owned enterprises that are of good quality, credit worthy and competitive to go outside the Mainland". I believe it is in this context that the proposed expansion in the scope of investment through the QDII schemes organised by Mainland banks is being considered. Having had a year's experience in establishing, operating and refining the schemes, it is obviously time to expand their scale and variety.

I am sure there is no lack of ideas on the Mainland about how these policy objectives can be achieved. The HKMA stands ready to co-operate with the Mainland authorities in designing the channels to facilitate capital outflow proactively and gradually, while maintaining a high degree of controllability. We have also made a number of practical proposals, including those set out in the Report of the Focus Group on Financial Services under the Economic Summit of last year on "China's 11th Five-Year Plan and the Development of Hong Kong" put forward to the relevant authorities. Contrary to what a few commentators would have us believe, these proposals are not about giving out candies to Hong Kong, but making the best use of Hong Kong's financial system to address financial issues on the Mainland for the benefit of the whole country.

Joseph Yam
26 April 2007

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