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Door opens for HK investments in Chinese mainland stocks

By Zhou Xiaoyuan (People's Daily Overseas Edition)

15:36, August 22, 2011

Edited and Translated by People's Daily Online

A top Chinese official recently announced that the county would soon launch the long-awaited RMB Qualified Foreign Institutional Investors (RQFII) program and start an exchange-traded fund linked to Hong Kong stocks. This will boost the two-way capital flow between the Chinese mainland and Hong Kong.

The official also introduced other polices on Aug. 17 for boosting Hong Kong's development, but none of them have received as much market attention as the announcement that qualified foreign institutional investors will be allowed to invest in stock markets in the Chinese mainland with an initial quota of 20 billion yuan, and an exchange-traded fund linked to Hong Kong stocks will be soon unveiled.

Thanks to the central government's efforts to boost the internationalization of the RMB, Hong Kong investors will soon be allowed to buy RMB-denominated A shares, and investors from the Chinese mainland will also be allowed to invest in Hong Kong stocks, analysts have said.

Analysts noted that the capital markets of Hong Kong and the Chinese mainland are opening up wider and wider to each other, which will not only help expand RMB investment channels in Hong Kong and promote cross-border RMB settlement and the internationalization of the currency but will also enhance Hong Kong's role as a financing center and a major center for offshore RMB business and RMB assets management. This move will greatly boost the financial and economic development of Hong Kong.

Bridgehead for RMB internationalization

Along with the steady growth in the volume of world trade, China has developed trade relations with almost all countries in the world. However, the continuous appreciation of the RMB against the U.S. dollar in recent years has greatly reduced the profits of Chinese exporters. A fundamental solution is to promote the use of the RMB as a trade settlement currency, and China needs a "bridge, springboard, and market" for the internationalization of its currency.

"Hong Kong serves as a major 'foothold' for promoting RMB internationalization," said Guo Tianyong, director of the Chinese Banking Industry research center at the Central University of Finance and Economics. "The amount of RMB-denominated savings in Hong Kong has reached 500 to 600 billion yuan. Attracting the funds to Chinese mainland through investment channels such as the RMB Qualified Foreign Institutional Investors and foreign direct investment will promote overseas acceptability and recognition of the RMB, perfect the functions of China's capital market and improve the financing environment for enterprises."

Dong Dengxin, head of the Financial Security Research Institute under Wuhan University of Science and Technology, said that that according to China's balance of payments, the current imbalanced capital flow as a result of huge capital inflows and inadequate capital outflows has directly led to a sharp rise in China's foreign exchange reserves, the RMB's appreciation and domestic inflation. The two-way opening up of the Hong Kong and Chinese mainland markets will further promote RMB internationalization and the establishment of the offshore RMB market.

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