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HKIFA Proposes Investment Route For Mainland Capital

by Mary Swire, Tax-News.com, Hong Kong

18 June 2002

The Hong Kong Investment Funds Association (HKIFA), whose 50 fund management members control more than US$200bn in assets, has suggested the creation of a new class of shares, which it dubs "C" shares, which would be offered for purchase and sale exclusively mainland investors. "C" shares would be offered by the 1,800 or so funds authorised by the Securities and Futures Commission and the money raised would be invested in Hong Kong and overseas capital markets through the funds.

The proposal comes in response to a speech given in March by Dai Xianglong, governor of the People's Bank of China, saying that the mainland would study ways of allowing the foreign exchange holdings of Chinese individuals, amounting to at least US$135 billion, to flow into Hong Kong's capital markets. That's the legal part of such holdings, of course - it is popularly supposed that mainland investors control at least that much again in 'illegitimate' foreign exchange holdings, much of which is already invested in Hang Seng stocks, normally off limits to mainland investors.

HKIFA has put its plan to the SAR's Financial Services Bureau and the mainland's China Securities Regulatory Commission. Au King-lun, head of client investment at HSBC Asset Management, told the South China Morning Post yesterday: "The importance of the buying and selling of the 'C shares' being restricted to within China means that if mainland investors redeem the shares, the money would still be legally kept in China's banking system."

While the HKIFA's plan has obvious attractions for Hong Kong, it is less likely to appeal to the mainland authorities, who will probably prefer alternatives which give them more control over the investment process, such as the setting up of closed-end funds in China to invest in Hong Kong assets. This method would also create a growing pool of fund management expertise in the mainland, a feature absent from HKIFA's proposal.

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