The rise of QDIIs is another event of no less significance in the capital market's development. Since its initiation in April, businesses and individuals have had less stringent rules to comply with about their possession of foreign currency and domestic individuals have had access to the overseas capital market through their money managers.

Analysts have variously interpreted the launch of the QDII scheme as an aid to add flexibility to the exchange rate system of the renminbi, as an exit for gigantic bank deposits, and even as a support for the financial market in Hong Kong.

Others see it as an outspoken signal from the authorities to encourage domestic capital to be pumped out of the country.

Given that the country is facing huge pressure over its balance of payments, the QDII scheme could see a gradual opening up of the capital account and may ease such pressure.

The authorities actually held off launching the QDII scheme until April this year because they were fully confident of the performance of the securities market.

More importantly, the scheme will help improve the mechanism determining the exchange rate of the renminbi and relieve the pressure on the country's fiscal policy posed by the ever-increasing foreign exchange reserve.

Since the PBOC began its reform of the renminbi exchange rate mechanism on July 21, 2005, it has taken a series of measures to improve the system.

However, the measures are far from adequate. The demand and supply for the renminbi cannot effectively interact without a free market on which the renminbi can be traded with other currencies.

The QDII scheme is an important means to promote trade between the renminbi and foreign exchanges before China fully opens its capital account. With this in mind, it is only natural for the authorities to accelerate the development of the QDII scheme.

As the reform of the domestic securities market gathers speed, both the QFII and QDII schemes will play a significant role in the development of the stock market and the national economy.

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