Shang Fulin, Chairman of the China Securities Regulatory Commission, said that the price gap between A shares and H shares will not diminish in the short term. According to Shang, this is because investors in the Hong Kong stock market are from all over the world and international investors are not familiar with mainland companies listed in Hong Kong.

"Stock prices are formulated based on the judgment of investors," Shang said. "With the exchange between stock markets in the mainland and Hong Kong, the price gap between A shares and H shares will gradually narrow. But for a period of time it will still exist."

Bells and whistles

Though Hu Keneng is an experienced player on the A-share market and a new hand to the Hong Kong stock market, he says he is mentally prepared.

In his view, the largest difference between the Hong Kong and mainland stock markets is that there is no price limit regime. Since 2006, when the bullish market began, the price of China Merchants Bank stocks Hu bought has risen from 6 yuan to 36 yuan. "[The price] is nothing on the Hong Kong stock market, and to mainland investors, we can also transact H shares based on the performance of the stocks at the A-share market," said Hu.

According to Hu, mainland investors can also utilize the time difference when investing in H shares. The A-share market opens at 9:30 a.m. and the H-share market opens half an hour later. If investors choose to invest in companies issuing both A shares and H shares and the A shares prices remarkably increase, they can immediately buy H shares of the companies after the Hong Kong stock market opens. For investors, this is good news.

Furthermore, to mainland investors, the transaction fees on the H-share market are lower than those in mainland. At present, transaction fees for H shares are 0.718 percent of the total transaction volume while those of A shares are 1 percent.

Gong Fangxiong, Director of the China research department for JP Morgan, thinks that the next one or two years hold the best opportunity for mainland investors to invest in Hong Kong stocks. In his opinion, the Chinese economy is now at a stage of high development. With the implementation of QDII mechanism and the Hong Kong stock express, there will be a large amount of capital transferred from the A-share market to the H-share market. H shares might even outrun A shares.

Although the Hong Kong stock market has a variety of appeals for mainland investors, Yi Xianrong, a researcher at the Institute of Finance and Banking of the Chinese Academy of Social Sciences, still warns that investors could be tripped up if they don't understand the Hong Kong stock market.

Yi pointed out that mainland investors mainly want to profit from the price gap between A shares and H shares, but they should note that compared with the Hong Kong stock market, pricing on the mainland market is more affected by policy and speculation. If mainland investors weigh prices of H shares simply based on the prices of A shares and buy H shares with high prices, they may loose out.

Raging bulls

Since the announcement of the new overseas investment policy in August, China's A-share market has remained bullish. The Shanghai Composite Index hit 5,400 points on September 6. Liquidity in the mainland market is still ample and the A-share market still has much more potential than other markets, Wang Jian said.

As an investor growing with Chinese stock market, Hu Keneng said that even if he is allowed to directly invest in the Hong Kong stock market he will not withdraw from the A-share market. "Compared with the A-share market whose indexes are increasing quite fast, the H-share market is more stable," Hu said. "And since domestic investors are more familiar with the operation of the A-share market, in the future I will still mainly invest in the A-share market."

Cheng Weiqing, Chief Strategic Analyst of CITIC Securities, thinks that the launch of the new policy simply legalizes present investment in the Hong Kong stock market. Cheng said it is hard to tell whether the new policy will spur huge flows of capital to the Hong Kong stock market.

Although the Hong Kong stock market is of appeal to mainland investors, Cheng believes that since most mainland investors have little knowledge of its mechanisms and rules, they won't act rashly in the short term. On the other hand, since the Hong Kong dollar is pegged to U.S. dollar and the renminbi is now appreciating, the opportunity to cash in from purchasing foreign exchange to invest in Hong Kong is quite large.

Li Feng, a strategic analyst with China Galaxy Securities Co. Ltd., believes that allowing mainland residents to directly invest in the Hong Kong stock market will not lead to a large drop in the A-share market. The U.S. sub-prime loan crisis has awakened more investors to the potential risks of investing in overseas stock markets, markets that can be influenced by political and economic factors in those countries or regions. Investors buying into overseas stock markets must keep abreast of these situations. On the other hand, with the present economic development status and excess liquidity in the domestic stock market, the long term bullish situation of the A-share market will not change even if some of the capital flees.

In order to avoid risks facing investors in the initial stage, supervisors are controlling the investment volume for the pilot area. This explains Shang Fulin's position that, "the amount of Chinese individual investment in the stock market of Hong Kong will be limited in the initial stage and will not have obvious impact on the A-share market of the mainland."

Letting the air out

Excess liquidity is the number one macroeconomic problem in China and increasing foreign reserves are the main cause. After QDII policies were instituted, direct individual investments in overseas stock markets are seen as an important measure to help further widen the channels for the outflow of foreign currency and promote the balance in international payments.

"Under pressure from the increase in foreign exchange reserves and renminbi appreciation, the government has begun to encourage individuals to make direct overseas investments," said Guo Tianyong, Director of the Research Center for Chinese Banking Industry of Central University of Finance and Economics. Guo believes that this new policy may to some extent alleviate these pressures.

Cheng Weiqing held the same view. According to him, as was the aim of QDII reforms, the new policy can expand investment channels for mainland residents as well as dry up excess liquidity.

However, famous financial commentator Ma Hongman said that while the Hong Kong stock express can allay excess liquidity, it won't cure it once and for all. "The excess liquidity in China is like a reservoir whose waterline is above the normal level and the Hong Kong stock express just turns on the tap to release the floodwaters," said Ma. "Turning off the tap that allows the inflow of the liquidity is the complete cure."