In a nutshell, this is the background of the new development in QDII in mid-May, when the China Banking Regulatory Commission (CBRC) announced its decision to widen the scope of investment under the QDII scheme. Mainland commercial banks offering overseas wealth-management business are allowed to invest in a wider range of asset classes, including equities and equity funds authorized by a supervisory authority with whom the CBRC has a memorandum of understanding (MOU).

Where an overseas intermediary is appointed as investment manager, it must also be regulated by a supervisory authority which has an MOU with the CBRC. As the first and the only authority to sign a MOU with the CBRC, the Hong Kong market and Hong Kong-authorized and regulated financial products and intermediaries are now given a head start to implement it.

Now that the funds can invest in the stock market and equity funds, Hong Kong, the fourth biggest stock market in the world with the highest concentration of mainland listed companies, clearly stands to gain in the revised scheme. Needless to say, with this psychological boost, the Heng Sang Index has been heading northward ever since.

China's foreign exchange surplus is already high and its growth remains unabated. There is increasing current-account surplus, continued strong capital inflow, rapid accumulation of foreign reserves and increasing difficulty in monetary management. This all leads to inflationary pressure and financial instability. This has also put the country in a very awkward position, with constant international pressure for RMB revaluation.

China cannot always use administrative measures to bar the flow of capital as the nation tries to integrate itself into the global economy. And it has no intention of artificially slowing its exports. China must come up with ways and means to spend these accumulating foreign currencies in the market fast.

QDII can help China quickly link its financial market to the world, especially as China still imposes foreign exchange controls. These new measures will facilitate the orderly outflow of funds from the mainland and fully utilize Hong Kong's position as an international financial center.

The implementation of QDII in Hong Kong can be seen as one of the classic examples of how best to utilize Hong Kong's advantages for the mutual benefit of both the mainland and Hong Kong.

However, if we put too much hope in the revised QDII plan, we might be in for another disappointment. It now looks as if we will call ourselves lucky to quickly consume the existing $12.6 billion quota. But this solves only a small portion of the problem.

After all, how long will it take for the QDII system to digest this sizable amount is still a question. One thing is certain, QDII alone cannot save the day for the country's foreign exchange predicament.

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