Once, the chairman of a listed company was summoned by the security regulatory authority to explain the rapid rise of its share price. "There are more buyers than sellers, gentlemen," he said. The movement of the stock market can only be explained by the flow of funds. When money comes in, the market rises, and when it goes, it falls. It is as simple as that. That is why when certain big international brokers announce that they are going to increase the composition of Hong Kong stocks in their portfolio, the Hang Seng Index jumps the next day.

This was exactly the same reaction sparked by the central government issuing joint regulations that will open up the channels for domestic institutional investors to invest abroad and relax controls on domestic firms and individuals buying foreign exchange on April 14, which was Good Friday, part of the Easter public holidays in Hong Kong. When the Hong Kong Stock Exchange opened for business on April 18, the market danced. In particular, the SOE Index shot through the 7,000 barrier, reaching its highest point since 1997. The world rejoiced too. The Dow Jones Industrial Average, Nasdaq Index and S&P 500 all rose about 2 per cent.

As officially acknowledged, these measures, announced before President Hu Jintao's visit to the United States when currency and trade issues were expected to top the agenda, will provide an outlet for the outflow of foreign currency, thereby decreasing upward pressure on the yuan. At the end of March, China's foreign exchange reserves stood at US$875.1 billion, surpassing those of Japan and prompting calls to curb their rapid growth.

International finance is a funny game. To China, transferring some of its foreign currencies from the public coffers into private hands is a zero-sum game, as nothing is gained or lost within the country. And to let some of this money find more profitable investment outlets will do us no harm either. But if these simple measures seem a big difference to some countries, and do not pose any harm to the country's financial security, then the Qualified Domestic Institutional Investor programme, or QDII, which allows reputable professional financial institutions to invest overseas on behalf of individuals and institutions through a variety of investment instruments, is indeed an ingenious move.

The programme is expected to begin in May, and this is the first time that domestic households and firms in China have been granted official access to overseas securities markets. It will provide more choice to Chinese investors and most probably a higher return at the same time.

 Even though all of this money is being most conservatively invested in US treasury bonds, an annual return of 5 per cent is much better for domestic investors who now get slightly over 2 per cent putting their savings in a bank. Currently, they hold an astronomic US$4 trillion in local currency cash and domestic bank deposits, and US$140 billion in foreign exchange.

Any changes in the composition of this gigantic sum of money and its direction of flow will definitely have a significant impact on international capital markets.

A forecast US$4-6 billion of investment funds will flow into the international financial market in the next quarter through the QDII mechanism. For the whole year, the flow is expected to swell into some US$10-12 billion, clearly situating China as a new big spender, and a force to be reckoned with. Hong Kong, as China's own international financial centre, and the only centre for offshore renminbi transactions, will be among the first to benefit from these new measures.

Hong Kong's financial markets have, over the years, evolved into the predominant fundraising platform for mainland enterprises, which now constitute 30 per cent of the total number of Hong Kong-listed firms, and their market value accounts for a 40 per cent stake in the total Hong Kong stock market capitalization. As all of the key players are now clustered in Hong Kong, and they are generally more familiar with the mainland market and enterprises than their counterparts elsewhere, the turnover of shares of mainland enterprises in Hong Kong is far higher than in any other international financial centre. A whopping 80 per cent of the stock transactions among mainland companies listed in both Hong Kong and US stock markets are now conducted in Hong Kong.

On top of that, the top 10 companies that made the largest ever initial public offerings (IPOs) in the Hong Kong market are all from the mainland. The biggest IPO in the world last year, a US$8.2 billion offering from the China Construction Bank, has pushed Hong Kong's year-end IPO total to US$25 billion.

Out of the 70 IPOs in 2005, 80 per cent were raised by mainland enterprises. Another US$20 billion worth of State-owned Chinese banks are lining up to market this year.

The Bank of China IPO, delayed until the second quarter, will take up US$8 billion. Big Four accountancy firm PricewaterhouseCoopers predicted new IPOs in Hong Kong will reach another record high in 2006. By all accounts there will be many more mainland enterprises lining up to get listed in Hong Kong rather than anywhere else in the coming years.

Bonds are more secure fixed income instruments for investors, and therefore are more likely to be included in the QDII portfolio. The issuance of bonds in Hong Kong by mainland enterprises is also on the rise. Last year, more than 20 mainland enterprises issued and listed their bonds in Hong Kong, raising over US$8.5 billion. Hong Kong is therefore destined to become Asia's leading bond-issuing centre.

And the funny game of international finance goes on, as it looks very likely that most of the QDII funds coming to Hong Kong, together with large funding from other international sources converging here, will land back in the hands of mainland enterprises, fuelling China's economic development. At the same time, Hong Kong's position as the region's international financial centre is further consolidated. In one stroke, everybody is happy, and China is laughing all the way.

The author Lau Nai-keung is a member of the Chinese People's Political Consultative Conference from Hong Kong.