SHANGHAI, Feb. 7 (UPI) -- Sun Wei spends hours every day tracking the progress of his investments on the stock markets in New York and Hong Kong, reading overseas financial news on the Internet and chatting online with foreign investors about current market trends.
"I've been buying stocks on the Nasdaq for the past year," said the 29-year-old investor, without revealing which listed firms. "You have to be careful these days, the market is very difficult."
His investments are, in the view of the both the United States government and China, illegal and even risky, considering the harsh penalties for fraudulent business dealings on the mainland.
The transactions are handled through a third party investor, after the money is funneled through foreign currency accounts at Bank of China branches in both New York and Hong Kong.
"I know it is illegal, but we should be able to invest in overseas stock markets legally," he said.
For reasons that are political as well as economic, Mr. Sun and millions of other Chinese retail investors are barred from tapping into the potentially more lucrative overseas markets.
China's currency, the renminbi, is not fully convertible, so mainland investors now can only buy into in the country's highly speculative A-share market, which is burdened with poor-performing state-owned companies, and the much-smaller hard currency B-share markets.
Chinese authorities have ruled out plans to make the renminbi fully convertible anytime soon.
Beijing, which is extremely concerned about the impact of a massive surge of money out of the country, considers foreign investment illegal, and has been cracking down on "hot money" flows to overseas markets.
Sun said the political and economic barriers are merely preventing legitimate Chinese investors from buying overseas shares in some of their nation's top-performing enterprises.
Despite this, analysts say, the flow of money from mainland China into overseas stock markets has been increasing in recent years as investors find new ways to circumvent the barriers.
"It's well known that the illegal investment pipeline has existed for some time," an analyst for a U.S.-based securities firm, who did not wish to be identified, told United Press International.
Over the past year, Chinese investors have been illegally pouring money into so-called Red Chip and H-shares in Hong Kong, the former British colony which returned to China in 1997, he said.
"There's little that the authorities can do, if the money doesn't pass through the banks, it is simply mailed or wire transferred to overseas relatives or illegal brokerages," he said. "We're not talking about only small time punters here, but large institutional buyers investing huge sums of money."
The analyst estimated that millions of dollars are flowing through the illegal investment pipeline.
Most Chinese analysts agree, saying the demand for access to overseas markets is staggering.
"There are hundreds, perhaps thousands, of Chinese investors who want to put their money into overseas stock markets," said Wang Jie, an analyst for Haitong Securities in Shanghai. "Most of them want to invest in Chinese firms listed in Hong Kong, which are more than likely to offer them better returns than shares by the same firms floated on the mainland. But we cannot help them."
Wang said concerns over the state of China's stock market, which has declined more than 40 percent in the past year, has investors eyeing overseas markets as a more solid investment.
"Investors have lost much money over the past year," he said. "The market outlook is grim."
Analysts say the illegal practice has been given impetus by China's fast-growing foreign currency accounts, particularly in U.S. dollars, which reached $79.4 billion at the end of last September.
Increasingly, Chinese families in affluent cities such as Shanghai and Guangzhou have opened foreign currency savings accounts, mostly as a safeguard against a devaluation of the renminbi.
"China's retail investors are young but ambitious, and want to play with the big boys," said Zheng Hongri, a senior analyst with Shanghai Securities. "They are tearing down the artificial barriers."
Faced with preventing a massive illegal outflow of funds, authorities in Beijing are considering a series of proposals aimed at loosening restrictions on overseas investment by Chinese citizens.
Recent state media reports indicate that Beijing is already in talks with officials in Hong Kong over a proposal to allow investors from the mainland to buy shares listed on the Hang Seng index.
Chinese officials have hinted that overseas investments could be managed under a qualified domestic institutional investors (QDII)system, with closed-end funds for foreign-listed shares.
"Establishing a QDII system in China would give mainland investors access to more profitable listed companies and more stable international markets," said Wang from Haitong Securities.
Another proposal calls for the introduction of China depository receipts -- similar to the American Depository Receipts -- giving mainland investors limited access to Chinese firms listed overseas.
But analysts caution that China is unlikely to loosens its tight control of monetary policies, making any major changes in the nation's overseas investment system even less likely.
"It will take the government at least a couple of years to consider the proposals, let alone implement them, which could take several more years to accomplish," Wang said.
