(CRIENGLISH.com)
Updated: 2007-08-28 17:27

To buy or not to buy, that's the question.

Knowing exactly what you want is the key to making the right decision.

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Mainland residents will be able to directly invest in overseas securities market. The State Administration of Foreign Exchange has announced a pilot program, allowing investors to use foreign exchange or purchase foreign currencies for their overseas investment. The move is set to open a new channel for the outflow of China's enormous saving deposits and help relieve pressure on the country's mounting foreign reserves.

Under a pilot program to be launched in the northern city of Tianjin, mainland residents can use foreign exchange or purchase foreign currencies, with which to open an account with the Bank of China's Tianjin branch.

At the initial stage, investors can buy shares on the Hong Kong stock market.

As a bonus, they won't be subject to a rule that limits foreign-exchange purchases to 50,000 US dollars annually.

Researcher Yi Xianrong says this is an important measure to widen the channel for foreign exchange outflows.

"If people can invest overseas, it will increase their investment channels and alleviate pressure brought about by a fast growing foreign reserve. The move is an important step in fully opening up China's capital account. It shows China's foreign exchange reform is moving forward step by step."

China previously put restrictions on cross-border outflows of capital by companies and individuals, to prevent economic instability brought about by large-scale money flows.

But the country's foreign reserve has now surpassed 1.3 trillion US dollars, the biggest in the world. In addition, money is pouring into the mainland as a result of a growing trade surplus, resulting in some problems like over-mobility.

Meanwhile, people's income has evidently increased along with the rapidly growing economy, creating increasing demand for investing in security markets.

Zou Lin, an official with the State Administration of Foreign Exchange, says these have created a favorable environment for allowing individuals to invest overseas.

"I think it's the right time to conduct this trial program. There's strong demand for multi-channel investment and the scattering of investment risk among individuals. Meanwhile, China's foreign exchange reserve is now sufficient and able to meet such a demand from investors."

Prior to the pilot program, individuals have only been able to invest overseas indirectly through banks, brokerages, insurers and fund managers, through the qualified domestic institutional investors scheme.

Analysts expect individual investors will hit the stocks of mainland companies listed in Hong Kong after the direct overseas investment program is put in place. There they can trade at an average of 21 times earnings, much more inviting than the 50 times multiple for the benchmark stocks listed in Shanghai and Shenzhen.

Zhang Gang is a researcher from the Chongqing-based Southwest Securities.

"It will have a psychological impact on the mainland A share investors. But if there are some strict restrictions over the identity of the investor, the capital outflow cannot be too much."

Hong Kong Financial Secretary John Tsang and chief executive of the Special Administrative Region's Monetary Authority Joseph Yam have welcomed the mainland's move.

Hong Kong Exchanges and Clearing Limited has been quoted as saying that mainland investments in the Hong Kong market will help narrow the price gap between Hong Kong-listed H shares and mainland-listed A shares, and will help foster the healthy development of both markets.

Chief economist of the Beijing-based Galaxy Securities, Zuo Xiaolei, suggests investors be prudent when trading overseas securities.

"It's a very crucial principle on the market that one doesn't invest in something he's unfamiliar with, especially when it comes to financial derivatives. Financial derivatives usually pose an unsuitably high amount of risk for small or inexperienced investors."

China's building up its securities market, with financial derivatives still in their infant stage. The country has just eased controls over the issuance of corporate bonds, which have been well developed in developed nations and many other emerging economies.

"It is advisable that mainland individuals not invest in the products with high risks."

After Tianjin, the eastern city of Shanghai is expected to become the next target for the pilot program.

So, to buy or not to buy, have you made up your mind?