Analysts expect the government's move to allow mainlanders to invest directly in the Hong Kong market will have a "moderately negative" impact on A shares.

The State Administration of Foreign Exchange said last Monday that retail investors will be allowed to invest in the Hong Kong market directly through Bank of China brokerage accounts. Trade is expected to begin in early September.

"The impact of this new policy on the A-share market will be moderately negative. Fund outflows under this new individual investment program will help ease excess liquidity and demand for financial assets," said Wang Qing, chief economist for China at Morgan Stanley Asia Ltd.

"Some investors will likely choose to liquidate their holdings of A-share stocks to invest in H shares or other stocks on the Hong Kong market.

"But since the forex outflows under this new program are unlikely to be large enough to offset forex inflows stemming from trade surpluses, the strong A-share market performance is unlikely to change due to excess liquidity," he said.

Stephen Green, an economist at Standard Chartered Bank, said: "It should make it a lot easier for ordinary punters to invest in H shares, which with present valuations should mean considerable bullish sentiment hitting H shares and less bullish sentiment for A shares over the next few months as the funds begin to flow."

Jonathan Anderson, chief economist at UBS, said that major financial institutions, trade-oriented companies and foreign-invested firms might have an easier time moving capital in and out of the mainland, but average local firms and households will not.

"There's only limited arbitrage between onshore and offshore returns, so there's clearly still 'bang for the buck' from opening a capital account," he said in a recent report.

"It might help alleviate the huge price differentials between mainland and Hong Kong-listed Chinese companies. But recent turmoil on global markets and the inexperience of mainland investors regarding overseas investments may limit the amount of capital outflow in the short term," said Liang Hong, chief economist at Goldman Sachs (Asia) China.

Analysts also expect the pilot scheme to have a negative impact on the qualified domestic institutional investor (QDII) scheme. "Being able to buy individual stocks directly on the Hong Kong market could also make this program superior to collective investment programs such as the QDII, whose investment track record has yet to be proven," said Wang.

(China Daily August 28 2007)