TO THE POINT: The bullish Chinese stock market defied the fourth interest rate hike of the year to reap a total market value of over 22 trillion yuan by August 22--its highest mark ever. Chinese individual investors were allowed to buy overseas shares, greatly benefiting the Hong Kong stock market. Given the buoyant mainland stock market, the return of red chip companies--mainland companies listed in Hong Kong--was put off due to failures to coordination between the two sides. South Korean SK Telecom acquired 6.61 percent of China Unicom’s shares. Wholesale pork prices fell but pork prices will remain high due to the coming Mid-Autumn and National Day festivals. By LIU YUNYUN

Chinese to Buy Overseas Shares

Citizens of the Chinese mainland will be allowed to invest in overseas securities directly under a pilot program soon to be launched in north China’s Tianjin Municipality.

This news greatly excited ambitious individual investors who are not satisfied with the fledgling Chinese stock market.

According to a statement of the State Administration of Foreign Exchange (SAFE), investors can use their foreign exchange or purchase foreign currency to open an account with Bank of China's Tianjin branch or with Bank of China International Securities in Hong Kong.

There would be no limit for the individual investment in overseas securities.

Stephen Green, Senior Economist with Standard Chartered Bank (China), described it as “a historic move in China's capital account opening.” The move is seen as helping to ease liquidity pressures in the country. SAFE said in the statement that this is an important measure to widen the channels for foreign exchange outflows and promote balance in international payments.

Chinese foreign reserves have been piling up due to rapid increases in the trade surplus and foreign direct investment as well as international speculative capital, leading to excessive liquidity. The Chinese Government, thinking of ways to rein in the ballooning foreign reserve, first launched its QDII (qualified domestic institutional investor) system, followed by this individual investors’ program.

The Hong Kong stock market is widely seen as the biggest beneficiary from this individual investor program, as mainland investors are likely to buy stocks of mainland companies listed in Hong Kong.

"The policy will surely be welcomed by Hong Kong investors, because participation by mainland investors will help boost confidence as well as market sentiment," said Paul Lee, banking and insurance analyst at Hong Kong-based Taifook Securities.

Interest Rates Up Again

It came as no surprise to the market that the People’s Bank of China, the central bank, raised the interest rates for the fourth time this year on August 21.

The one-year deposit rate will increase another 27 basis points to 3.60 percent, while the one-year lending rate will rise by 18 basis points to 7.02 percent, effective on August 22, the central bank stated. The move is aimed at better steering bank credit and stabilizing inflation expectations, according to the statement.

“Interest rate hikes are normal in a bullish market,” said Zuo Xiaolei, Chief Economist with Galaxy Securities. The purpose of interest rate raise was meant to prevent the economy from overheating and reduce inflation possibilities.

There are several major contributors to this round of interest rate hikes. In July, the trade surplus rose 67 percent from a year earlier to $24.4 billion, the second-highest monthly total, and the money supply climbed 18.5 percent, the biggest increase in more than a year. Fixed assets investment in urban areas increased 26.6 percent in the first seven months from a year earlier. Most importantly, the consumer price index (CPI), a barometer of inflation, jumped to a decade high 5.6 percent in July, well above the official target of 3 percent.

Despite the latest interest rate raise, the real interest rate is still negative--the one-year interest rate is now 3.6 percent. Major investment banks estimated the whole year CPI growth will be around 4 percent, a bit below the July surge.

The Chinese stock market defied the interest rate hikes again by rising 0.5 percent on the second day the news was announced.

Return of the Red Chips Suspended

The widely expected return of red chips to the mainland stock market will be put off due to failures to coordinate between mainland and Hong Kong regulators.

Red chip companies are mainly mainland companies registered and listed in Hong Kong, for instance, China Mobile and China National Offshore Oil Corp.

In the middle of this year, the Chinese Securities Regulatory Commission stated that it welcomed the red chips to return to the mainland market and would pave the way for their initial public offering (IPO) on the mainland. China Mobile was expected to be one of the first to return. Red chips also expressed their willingness to return.

However, on August 16, Wang Jianzhou, Chairman of China Mobile, said that the company had no timetable for returning to the mainland market, attributing the delay to complicated procedures.