International | May 14 2007
By Rudi Filapek-Vandyck
Chinese authorities have announced they will allow qualified domestic institutional investors to invest in overseas equity markets, a move that was widely expected as the domestic share market is showing all characteristics of a text book bubble.
Analysts suspected the government was considering allowing the diversion of some of the Chinese funds into foreign assets and the Chinese government has now delivered.
According to a statement issued by the China Banking Regulatory Commission, Chinese commercial banks can now invest up to 50% of their funds in the qualified domestic institutional investors program to buy overseas stocks. The ban on investments in commodity derivatives, hedge funds and securities rated below a BBB investment grade rating remains in place.
The announcement follows reports the China Securities Regulatory Commission (CSRC) recently submitted a study to the State Council, conceding the domestic share market was inflating because of excessive funds inflow. Unnamed government sources cited in one of the Chinese newspapers said the CSRC was not going to resort to ‘administrative forces’ to manage the stock market, it would instead allow the market to mature further and make a self-correction.
One of the beneficiaries of the move is likely to be the Hong Kong share market, some experts believe.
Further moves are to be expected, including additional monetary tightening. A view shared by analysts at DBS who argued this morning recent economic data from China point into the direction of further tightening.
If the trade surplus continues to grow at the current pace, DBS argues, it will be difficult to contain the growth of money supply/loans in China. The analysts believe fixed asset investment for April probably accelerated to 26% from 25.3% and April CPI inflation is expected to come out at 3.2%, above the PBOC’s target of 3%.
DBS believes Chinese retail sales growth will have edged upward to 15.5% from the 15% average pace of the past three months.
DBS believes the next interest rate hike is around the corner and will be delivered before end-June at the latest.
