On the other side of the coin, QDII will be a possible source, a very big one for that matter, of investment funds for Hong Kong. But whether the money will actually be invested in the Hong Kong equities market will depend on many factors.

Currently numerous commentators put a lot of emphasis on the price differential between mainland A-shares and Hong Kong H-shares. But that margin will seem small compared with the possibly huge short-term windfall that could be made in the mainland market.

On top of that, there is currency exchange risk investing outside the mainland when all eyes are still on China to appreciate the RMB. On the whole, the Hong Kong equities market is very narrow, concentrating only on stocks and warrants.

Should the $12.6 billion be thrown into the Hong Kong stock market within a short period, it will certainly create a bubble there. And when the bubble bursts, a lot of investors, including many mainlanders channeled through QDII, will get hurt.

On the whole, the revised scheme poses great challenges to the skill and professionalism of the fund managers and the supervisory capability of the Hong Kong financial sector, which is now being put under great strain.

The author, from Hong Kong, is a member of the National Committee of the Chinese People's Political Consultative Conference

(China Daily 05/21/2007 page4)

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