The rise of QDIIs is another event of no less significance in the capital
market's development. Since its initiation in April, businesses and individuals
have had less stringent rules to comply with about their possession of foreign
currency and domestic individuals have had access to the overseas capital market
through their money managers.
Analysts have variously interpreted the
launch of the QDII scheme as an aid to add flexibility to the exchange rate
system of the renminbi, as an exit for gigantic bank deposits, and even as a
support for the financial market in Hong Kong.
Others see it as an
outspoken signal from the authorities to encourage domestic capital to be pumped
out of the country.
Given that the country is facing huge pressure over
its balance of payments, the QDII scheme could see a gradual opening up of the
capital account and may ease such pressure.
The authorities actually held
off launching the QDII scheme until April this year because they were fully
confident of the performance of the securities market.
More importantly,
the scheme will help improve the mechanism determining the exchange rate of the
renminbi and relieve the pressure on the country's fiscal policy posed by the
ever-increasing foreign exchange reserve.
Since the PBOC began its reform
of the renminbi exchange rate mechanism on July 21, 2005, it has taken a series
of measures to improve the system.
However, the measures are far from
adequate. The demand and supply for the renminbi cannot effectively interact
without a free market on which the renminbi can be traded with other
currencies.
The QDII scheme is an important means to promote trade
between the renminbi and foreign exchanges before China fully opens its capital
account. With this in mind, it is only natural for the authorities to accelerate
the development of the QDII scheme.
As the reform of the domestic
securities market gathers speed, both the QFII and QDII schemes will play a
significant role in the development of the stock market and the national
economy.
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