Liberalization of China's financial system gains steam

A SARS-battered China this week sent a clear signal to investors that it plans to push ahead with financial liberalization after granting approval to two foreign brokerages to trade securities in its domestic markets.

The landmark announcement gives Swiss banking giant UBS and Japan's leading brokerage Nomura Securities first dibs on China's US$500 billion markets, effectively Asia's second largest after Hong Kong.

Perhaps importantly, analysts said, it sets the stage for further reform of China's Byzantine markets, indicating Beijing's willingness to continue opening up its financial markets.

"The signal is very clear. China is assuring the world it will not slow the pace of reform and liberalization," Salomon Smith Barney economist Huang Yiping said.

While and analysts applauded the deal as confirmation of a reform-minded Beijing, another scheme to allow mainland Chinese investors to trade overseas shares returned to the fore, helping boost Hong Kong's embattled equities market.

This plan, commonly referred to as QDII or the "qualified domestic institutional investor" program, was put forth by the Hong Kong government in 2001 as part of its bid to give the former British colony's flagging economy a shot in the arm of China's huge foreign currency reserves.

Such a move would also mark a significant liberalization of the central government's forex regime.

With private forex savings of over US$90 billion, Hong Kong authorities are banking on the Chinese investor eager to invest cash other than in China's rickety markets or domestic banks.

"The launch of QDII will be helpful in making good use of Chinese huge savings, which are largely parked in banks with low interests," said Eddie Yin, a professor at the China Academy of Social Sciences.

To date, authorities denied reports they would soon allow domestic investors the chance to invest overseas, but a first draft to create pool funds worth US$2 to US$5 billion dollars managed by qualified domestic asset managers is already under review, sources said.

The program must now gain clearance from the China Securities Regulatory Commission, China's central bank and the National Foreign Exchange Administration Bureau.

While final go ahead will probably not see the full light of day until next year, it would mark China's first tentative steps to full convertibility of its capital account, said Chen Xingdong, a China economist at BNP Paribas Peregrine.

But consolidation of money and forex markets with central bank coordination are imperative before the sluice gates open that would set the yuan free on international forex markets.

QDII, like most of China's economic reforms which have gradually moved its state-controlled economy to a market-oriented one, will be a carefully controlled experiment, highlighting Beijing's cautious attitude toward change.

"It's not the ripe time for the launch of QDII in the near future, given the relatively poor regulatory supervision of the domestic capital markets," said Wang Songqi, vice director of the China Academy of Social Sciences.