China to Let Banks Buy Stocks Overseas for First Time (Update3)
By Luo Jun and Zhao Yidi
May 11 (Bloomberg) -- China will let its banks buy shares overseas for the first time, diverting some of the country's 35 trillion yuan ($4.6 trillion) of savings from a local stock market where trading has surged sevenfold.
Commercial banks can invest as much as 50 percent of funds in the qualified domestic institutional investors program, or QDII, in overseas stock markets, the China Banking Regulatory Commission said on its Web site today. Investors need at least 300,000 yuan to buy such financial products, the regulator said.
This will help ``cool the very hot domestic stock market a bit,'' said Gabriel Gondard, who oversees $3.5 billion in Shanghai as a fund manager at Societe Generale venture Fortune SGAM Fund Management. ``Don't expect it to trigger a crash. Investors are still reluctant to invest overseas with booming stocks and expectations of currency appreciation at home.''
China wants more money to be invested abroad to slow the growth in the country's $1.2 trillion in currency reserves, which are flooding the domestic market with cash. Local investors have shunned QDII because they had been limited to lower yielding fixed-income and money-market products.
``The government is easing restriction on capital controls so that the central bank won't be the only institution to deal with the flood of foreign exchange coming in,'' said Tao Dong, Credit Suisse Group's China economist. ``The QDII was introduced to help mop up excess liquidity in the system.''
Bubble Trouble
China's CSI 300 Index has surged 81 percent this year, after more than doubling in 2006, as investors seek higher returns than the 2.79 percent one-year savings rate at banks. The surge has prompted officials including People's Bank of China Governor Zhou Xiaochuan to warn of a stock market bubble.
Daily turnover jumped almost sevenfold from 2006 to 131.6 billion yuan in the first three months, as investors opened 8.7 million new accounts to trade shares, the People's Bank of China said in its first-quarter monetary policy report yesterday.
The market boom and improving social security protection will boost spending in an economy that expanded 11.1 percent in the first quarter, according to the report.
The government has granted a total of $13.4 billion in QDII quotas to 15 commercial banks.
At the end of November, Chinese banks sold less than 3 percent of their QDII quotas. U.S. 10-year government bonds are yielding 4.62 percent a year, while the yuan has appreciated 4.3 percent against the dollar in the past twelve months.
Yuan Pressure
Expanding QDII may reduce pressure on the yuan to appreciate. The currency this week had its biggest gain since the end of a fixed dollar link in July 2005 and the U.S. is pressing China to let the currency rise more quickly.
The regulator's move ``will enable investors to have a more diversified investment portfolio and better manage risks,'' said Zhang Junyong, who runs Bank of China Ltd.'s QDII fund in Hong Kong.
Hong Kong's stock market may be the biggest beneficiary, said China International Capital Corp. Chief Economist Ha Jiming.
``Hong Kong is the most natural starting point as the QDIIs are most familiar with the Hong Kong market, especially the Chinese companies listed there,'' he said in a phone interview today in Beijing. ``It will be positive news for H shares,'' as Hong Kong-traded Chinese stocks are called.
The Hang Seng China Enterprises Index has gained 0.5 percent this year, lagging behind the 19 percent advance by the benchmark Hang Seng Index.
Banks are still banned from investing in hedge funds, commodity derivatives and securities rated below investment grade, the banking regulator said.
Individuals will still be barred from investing directly overseas.
To contact the reporter on this story: Luo Jun in Shanghai at at jluo6@bloomberg.net
Last Updated: May 11, 2007 07:43 EDT
