If the consumer price index (CPI), a key gauge of inflation, continues to rise, "we don't exclude the possibility of raising interest rates again," Zhou Xiaochuan, governor of the People's Bank of China said in Basel, Switzerland, on Saturday.

The central bank has raised rates twice this year, with the latest on May 19 when the benchmark one-year deposit rate was raised 27 basis points to 3.06 percent.

Also in May, the CPI rose the highest in more than two years - 3.4 percent year on year - as pork and food prices soared. It was the third month this year that the CPI exceeded or nudged the 3 percent mark set by the central bank for this year.

High volatility in the stock market also scared new investors away from investing directly on individual stocks. Daily new A-share account openings have been growing slowly while new fund accounts were maintained above the 100,000-level last week.

New Account Opening
Source: China Securities Depository and Clearing Co Ltd

Date	A share	B share	Mutual fund	Total
2007-06-18	216,688	1,739	188,064	406,491
2007-06-19	184,620	1,725	138,155	324,500
2007-06-20	171,984	1,566	113,932	287,482
2007-06-21	160,104	1,359	133,766	295,229

This year, mutual funds have paid out 89.275 billion yuan in profits to investors, much larger than the 65.147 billion yuan for the same period last year, according to the China Securities News. Open-end funds paid 85.825 billion yuan while closed-end gave 3.45 billion yuan to subscribers. Of the 307 open-end mutual funds, 26 paid out more than 1 billion yuan each, said Wind Info, a leading financial data provider.

Following the lead of banks, securities and fund management companies will soon launch their investment plans as the Qualified Domestic Institutional Investors (QDII). But according to securities insiders, due to the limited QDII scale in the early stages, the domestic A-share market will not be greatly affected by the outflow of funds.

The China Securities Regulatory Commission recently announced rules allowing eligible securities and fund management companies to get QDII licenses. Currently, there are nine securities companies and nearly 20 fund management companies meeting the above requirements.

A report from China International Capital Co Ltd predicts that the QDII program will have a limited impact on the A-share market. Many securities and fund management companies are not very knowledgeable about overseas markets; their investment may focus on the H-share market in Hong Kong. Due to the recent red-hot A-share market, their enthusiasm for overseas investment is not so high, says the report.

Opposite opinions are voiced by Tang Xiaosheng from Guoxin Securities Co. Tang thinks the QDII rules may be one of the regulators's measures to control the overheated market. Over-priced stock and expectations of capital outflow will bring pressure to the A-share market, particularly, after regulators tripled the stamp tax for stock trading in A-share market. As a result, H-shares have become more attractive not only in terms of price but also in transaction cost.

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