A scheme to allow institutions in China to invest overseas has been postponed because of a split in opinion among the central financial authorities.

Hong Kong is likely to be the first beneficiary of the qualified domestic institutional investors (QDII) scheme.

But QDII will be shelved at least until the end of the year, industry sources said.

Any breakthrough in the implementation will have to wait until Chief Executive Tung Chee-hwa visits Beijing at year end for his annual duty report, said Xu Hongyuan, an official with the State Information Centre, a government think tank. Before then, the scheme is unlikely to be formally launched, he said.

The central bank and foreign exchange authorities are supportive of a quick launch of QDII- out of consideration of China's rapidly growing foreign exchange reserves.

The foreign reserves, already the world's largest after Japan's, soared by 35 per cent last year to US$286.4 billion.

The pool reached US$316 billion at the end of March, and is expected to "continue to grow steadily", according to a report by the State Administration of Foreign Exchange in May.

QDII can help relieve the pressure from the mounting foreign exchange reserves and reduce surplus under the capital account, said Xu.

But the China Securities Regulatory Commission (CSRC) fears that the scheme would drain capital out of the domestic stock market as bourses in neighbouring Hong Kong promise better returns with much lower profit/earning ratios.

A spokeswoman with CSRC has ruled out an imminent launch of QDII, saying the issue is still in the back seat for now as the QFII scheme (Qualified Foreign Institutional Investors) has just kicked off.

The scheme allows qualified foreign investors to play the mainland's A-share and bond markets under foreign exchange controls.

As the renminbi is still not fully convertible under the capital account, QFII was adopted as a transitional measure to open the mainland capital market.

But there has been growing demand for a parallel scheme to let domestic capital invest overseas. China's personal foreign exchange savings reached US$90.2 billion at the end of April.

Hopes for an early launch of the QDII plan have grown higher as Hong Kong and the mainland are going to formally sign a pact on closer economic partnership arrangement (CEPA) on June 30.

But QDII, which involves more complicated issues in the capital market opening-up and renminbi convertibility, would not be covered in this pact, insiders said.

Xu Ming, an analyst with Shenyin & Wanguo Securities, said the introduction of the QDII scheme is an unavoidable trend. "It is only a matter of time".