As individual investors from the Chinese mainland will be able to directly trade Hong Kong-listed shares via domestic accounts from today, a capital drain may occur from the mainland's stock markets, analysts said.

They also concurred that the gap in valuation between A-shares and H-shares will be narrowed.

Investors will be able to tap the business at Bank of China in Tianjin in north China under a trial approved by the State Administration of Foreign Exchange on August 20 to allow private investors to trade Hong Kong shares directly.

Branches of BOC across the country can participate after signing agreements with the Tianjin branch.

"The future extension of this policy to other major cities will improve the convenience for citizens in other regions, while the policy is a breakthrough," said Ma Jun, a Deutsche Bank chief economist in China.

The move, viewed as a big step forward in opening up China's capital account regime, will help channel the country's rising foreign exchange reserves but the effect may be limited initially at least.

"This is a theoretically bold move - the main purpose is to facilitate foreign exchange outflows to ease domestic excess liquidity and the pressure on a yuan appreciation," said Qing Wang at Morgan Stanley Research Asia/Pacific in a report.

"However, since the primary source of liquidity creation is forex supply from a large trade surplus which averages about US$20 billion per month, it is unlikely forex outflows under the pilot program would be large enough to offset forex inflows stemming from the surplus."

China's forex reserves topped US$1.33 trillion at the end of June as the world's largest due to its increasing trade surplus.

The capital drain from the A-share market may become a torrent when more investors, especially those with more funds and with the ability for higher risk taking, take to trading Hong Kong-listed shares, Qian Qimin, an analyst at Shenyin & Wanguo Securities, said.



Investors can also benefit from the lower trading costs of trading Hong Kong shares compared with those on the mainland.

They pay the same charges for trading the shares at BOC accounts in Tianjin as other investors who buy Hong Kong shares in the special administrative region: a 0.1 percent stamp duty and commission of about 0.25 percent, the bank said.

For mainland bourses, investors pay a stamp duty of 0.3 percent and brokers' commissions range from 0.2 to 0.3 percent.

Xiao Qiu, a financial professional in his thirties, said he will gradually shift his assets to the Hong Kong stock market from A shares as the yuan-backed market is already overvalued.

He is eying H-shares, or companies listed in Hong Kong and based in the mainland.

The benchmark Shanghai Composite Index has surged 87 percent this year so far after soaring 130 percent last year.

"The impact of this new policy on the A-share market should be moderately negative... Some investors will likely choose to liquidate their holdings of A-share stocks to invest in H-shares or other stocks in Hong Kong market," the Morgan Stanley report said.

Qian said the valuation gap of A-shares and H-shares will be squeezed due to the opening up of the market.

At present, A shares can be overvalued by up to four times of their H-share counterparts with the average of the former double the quotation of the latter, said Zhang Qi, a Haitong Securities Co analyst.

"The move should be the beginning of a major shift to merge A- and H- share prices," said Stephen Green, a Standard Chartered Bank senior economist.