INVESTMENT FROM CHINA

Is a wall of Chinese money about to hit global markets? On Friday regulators prised open the window and gave mainland investors their first opportunity to invest in foreign equities – raising the prospect that China will start decanting $4,400bn of bank savings into overseas markets.

That is some way off. Beijing has lifted restrictions on investing up to half the existing quotas for overseas investment – dubbed qualified domestic institutional investor, or QDII – in equities. That implies potential outflows of just $7bn-$9bn. Hong Kong's bourse, the obvious first port of call, can turn over more than that in a day. And even that amount may not be unleashed immediately. The attractions of, say, Hong Kong stocks pale when contrasted to the domestic market, up 48 per cent this year in local-currency terms.

Opportunities for meaningful arbitrage, too, are slim. The 40-odd stocks listed on both the domestic-currency A-share market and in Hong Kong trade on vastly differing multiples. China Life, for example, is 65 per cent more expensive in Shanghai. But the mechanics of QDII preclude stock selection; instead investors will have to buy funds or similar products sold by the banks. Given the inaugural role of these funds, the emphasis will be on conservatism and quality rather than exploiting valuation gaps.

Nonetheless, the move marks another milestone on the road to a fully convertible currency. It also demonstrates the extent of pressure on Beijing both to offset surging capital inflows and to cool the domestic stock market bubble. The stock market performance is almost wholly driven by captive liquidity, so broadening the investible universe would remove some of the froth. For now, however, the numbers are too small to have much impact on either front – or on overseas markets