HK could stand to win if Beijing releases reserves

Liberalization * The decision would free China's US$249 billion of foreign reserves for overseas stock purchase. * Hong Kong has been lobbying Beijing since 2001 to ease rules. * In 2001, black market traders totaled an estimated US$2 billion in Chinese purchases of Hong Kong securities.

China's spent the last three years opening Asia's second-biggest equity market to overseas investors. Now, for the first time, they may allow its citizens, who have US$1.1 trillion tucked away in savings accounts, to buy stocks abroad.

China's Administration of Foreign Exchange said in a report last week to the National People's Congress that it may allow domestic investors access to the nation's US$249 billion of foreign reserves to buy stocks overseas.

Hong Kong is a likely magnet for China's fund managers because the city's stocks trade at lower multiples than shares on the mainland and companies that trade in Hong Kong are held to higher accounting and corporate government standards.

Still, the prospect of new funds wasn't enough yesterday to jog Hong Kong investors from their fixation on Iraq.

"Currently people are focusing on Iraq more than anything else, said Bich Pham, managing director of TAL CEF Global Asset Management Ltd, who looks after US$1 billion of funds.

"As soon as the Iraq issue has been resolved, people will look more on local positive factors. At that time, Hong Kong will outperform," Pham said.

The benchmark Hang Seng Index was down about three-quarters of a point when the market closed for the midday break. Two China-related indexes, the Hang Seng China Enterprises Index and the Hang Seng China Affiliated Corporations Index also were lower after rising when trading opened.

CNOOC Ltd, China Mobile Ltd and other Chinese companies already trade in Hong Kong at a discount to shares in China.

Shares China United Tele-communications Corp, China's No. 2 mobile-phone company, trade in Shanghai at 27 times earnings and in Hong Kong at 13 times earnings.

Valuations many Chinese investors may welcome the opportunity to invest outside a home market where one in 10 publicly traded companies were found in 2001 to have doctored their financial records.

"There could be opportunities if there was a surge of liquidity from China," said Yoon Lai Choo, who helps manage US$1 billion at Comgest (Far East) Ltd. "Chinese fund managers that I have spoken to have been looking and could be potential buyers," he said.

"A few qualified domestic institutional investors may be allowed to operate part of their assets in overseas markets," administration director Guo Shuqing was quoted as saying on Saturday by China's state-run Xinhua News Agency.

Hong Kong has been lobbying Bejiing since 2001 to ease rules on outward-bound capital flows. It wants more investment from China's 1.3 billion people, who have one of the highest savings rates in Asia and limited investment options at home.

"This is good news for the Hong Kong stock market," said Yiu Chin, an investment director who manages more than US$50 million at Sparkle-Hall Portfolio Managers Ltd in Hong Kong.

Allowing investors to buy shares abroad would legalize a black market channel that funneled an estimated US$2 billion of mainland funds into Hong Kong shares in 2001.

China citizens from buying stocks abroad to prevent an exodus of foreign reserves, which the nation uses to protect the yuan's fixed-rate to the US dollar.

Since its entry into the WTO in December 2001, China has been moving to bring its markets in line with global practices. As part of that process, Beijing is opening its US$500 billion domestic equities market to foreign investors for the first time this year.