(Agencies)
Updated: 2007-09-21 13:31

The Chinese mainland is to impose a quota on investments on the Hong Kong stock market, which will reduce capital outflows to a fraction of the US$100 billion-plus forecast when its outward investment scheme was announced last month.

Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), said there would be no limit on individuals. But he said there would be tight controls on the total amount.

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Liu said there would be a "quota in general" and when that was reached, the State Administration of Foreign Exchange (SAFE) would reassess market activity.

"They can lift and readjust the quota if necessary and appropriate – it's a flexible ceiling," he told the Financial Times.

It was the first mention from China's financial authority of a quota on its plan to allow individuals to invest in foreign stocks. Chinese officials refused to disclose the level of the quota but it is reckoned to be lower than the amount of investment expected by the Hong Kong market, which has soared in anticipation of a flood of money from the Chinese mainland.

The benchmark Hang Seng Index has risen 26 percent since the SAFE announcement.

The new scheme, known as the "through-train to Hong Kong stocks" was announced by SAFE on August 20 and required investors to open trading accounts with Bank of China's (BOC) branch in the northern city of Tianjin.

SAFE said investors would be allowed to open accounts from any BOC outlet in the country and buy an unlimited amount of foreign exchange for the purpose. But the scheme has been delayed by disagreement between SAFE, CBRC, the central bank and the securities regulator.

The central bank's focus is on draining liquidity from the economy and making the currency more flexible. The securities regulator wants to avoid extensive overseas investment that could damage the booming domestic stock market, which most analysts regard as overpriced.

Jing Ulrich, chairman of China equities at JPMorgan, said the government was considering restricting the plan to residents of the big cities of Tianjin, Shanghai, Beijing and Shenzhen.

Mr Liu said: "We are supportive (of the scheme) but we are carefully looking at those banks who are channelling public funds to invest in Hong Kong stocks or via Hong Kong to invest in other markets to make sure they have a sound and solid risk control system. They must show me satisfactory answers before they can do the 'train to Hong Kong stocks'."