The Chinese government's proposal to allow mainlanders to directly invest in Hong Kong has been indefinitely put on hold, but the plan still offers the best chance to rid the country of rapidly accumulating foreign assets, Zetland Financial Group reports on its website.

As China's red-hot economy continues to sizzle, the combination of vast capital inflows and an appreciating exchange rate has posed a serious problem for the government in Beijing.

In a proposed effort to tackle the problem, China's State Administration of Foreign Exchange announced Aug. 20 that ordinary Chinese would soon be allowed to invest in Hong Kong stocks. Beijing currently allows only certain Chinese financial institutions to invest outside the mainland.

The new so-called "through-train" measure would extend the privilege to individuals, resulting in billions of dollars pouring into the Hong Kong market. Hong Kong's bourse climbed more than 40% after the announcement, expecting the plan would soon take effect.

However, Chinese Premier Wen Jiabao in early November said the Chinese government needed to fully consider the potential negative effects the plan could have on both mainland and Hong Kong stock markets before implementation. The surging Hong Kong exchange has drastically declined in response, and Wen has yet to announce a new start date.

But according to a report on Hong Kong-based Zetland Financial Group's website, the plan is still China's best option to reduce ever-growing capital inflows.    

"I have little doubt that it is in the interest of the mainland to start the train running," says Joseph Yam, chief executive of the Hong Kong Monetary Authority. "It is important for the mainland to induce an orderly outflow of capital on a meaningful scale, having regard to the macroeconomic imbalances."

Yam says at the initial stage, the "through train" scheme should have a minimum investment amount, and access should be limited only to investors in major cities who are likely more aware of the risks involved.

The report is one of many carried each month by Zetland Financial Group. Established in 1987 and headquartered in Hong Kong, with offices around the world, Zetland is a business consultancy offering personal service and professional advice with total confidentiality.

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