Hong Kong monetary authority governor Joseph Yam insists that China’s plan to encourage domestic investors to put money into Hong Kong is still on track, after Beijing imposed restrictions on the scheme.
The scheme will provide a fundamental mechanism to sap out excess liquidity in China’s domestic banking system and equity markets, as well as addressing the country’s balance of payments surpluses, Yam said in an interview with Emerging Markets.
“This is certainly conducive to monetary management on the mainland, easing the pressure generated by increases in foreign reserves and ample liquidity in the financial system”, Yam said.
China loosened its capital controls in August, to allow individuals to invest foreign currency in Hong Kong’s equity markets, via a Bank of China Ltd account in Tianjin. The city-state would thus act as a platform to monitor the capital flow effects of China’s capital account liberalization.
Hong Kong markets soared to record highs on the announcement, but there are now fears the project is on hold.
Analysts say the State Administration of Foreign Exchange, which is charged with maintaining a stable exchange rate, was the key driver behind the scheme. But the China Securities Regulatory Commission is believed to have insisted on restrictions, fearing that the measure would disrupt its policy of a gradual capital account liberalization.
Chinese householders have an estimated 17 trillion yuan ($2.2 trillion) of savings, and management of fund flows is crucial to monetary policy.
Grace Ng, greater China economist at JP Morgan, suggested that the restrictions on the investment scheme – which carries some potential risks – may in fact help Hong Kong.
“The scheme has the potential to market Hong Kong as now mainly a Chinese play for international investors”, she told Emerging Markets. “As a result, it will be subject to more sensitivity if there are policy changes in the mainland, as well as being affected by the untested sentiment of Chinese retail investors.”
In other comments, governor Yam defended the dollar peg, after the appreciation of the Chinese yuan, and the resulting weakness of the Hong Kong dollar, put pressure on the 23-year old arrangement.
“For on open and externally-oriented financial centre with strong international capital flows but no capital controls, linking our currency to a this international currency [the US dollar] provides a predictable and conducive business environment for an economy that imports practically everything that it consumes, processes or re-exports.”
Yam also rejected suggestions that a currency alignment with the mainland should be considered.