Since the QDII (qualified domestic institutional investor) plan launching last July, it has not been very popular in its test market, Hong Kong.

The QDII plan will allow Chinese citizens to invest in overseas equities markets with designated foreign currencies. QDII works through qualified institutional investors such as fund management companies.

A quota of $12.6 billion has been allotted for the operation, but only $300 million, or 2.4 percent, has been utilized. Obviously, when the domestic stock market is like a crazy bull and nobody cares about risks, who will bother with the seemingly low yielding overseas market.

But things may be about to change. The number of players in China's stock market is now rapidly approaching 100 million, and the banks are still flooded with liquidity. The bubble is about to burst, and decision-makers have to do something fast.

QDII is an obvious candidate on the short list of possible measures. If successful, it has the advantage of killing three birds at the same time: curbing the surplus of savings and foreign exchange and cooling the yuan-denominated A-share stock market.

Another advantage, the plan is already in place. The machinery is now moving smoothly along after a year's experience in establishing, operating and refining the system.

This will be the fastest measure to be implemented since all it takes is some relaxation fine tuning. It is also safer because it is highly regulated and orderly. Any possible troubles will take place in Hong Kong, where there is a firewall separating the mainland.

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.

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