HONG KONG:

China is now, for the first time, permitting its citizens to invest overseas. This is a momentous development, for two reasons.

First, the Chinese are prodigious savers with some $2.25 trillion in household savings. The financial impact of some of this money flowing to markets around the world should not be underestimated.

Second, this initiative will provide an important release valve for an exuberant Chinese stock market, where a sudden and massive shift into stock investments has propelled share prices to a fivefold rise since the start of 2006. The way this plays out could have important implications for both global markets and China's newfound affluence.

China's citizens have traditionally saved more than 40 percent of their earnings. As a result, the country's banks are awash with savings. This large pool of funds fueled the investment boom that turned China into one of the world's top manufacturers. You could say modern China has been built on the backs of its savers.

Traditionally, ordinary Chinese citizens had little choice but to keep their earnings in bank accounts. China didn't have a stock market until the 1990s, and when it first opened, many early investors rushed in excitedly, got burned, and vowed never to return. Until recently, China's biggest and best-run companies usually opted to list offshore - primarily in Hong Kong (considered overseas), Singapore and the United States - where Mainland Chinese investors couldn't own them.

Thus for many years, the world's fastest-growing major economy had one of the world's quietest stock markets. But beginning a couple of years ago, investors began returning to the stock market after a series of reforms improved protections for minority shareholders. At the same time, many Chinese companies rose to become global giants - Industrial and Commercial Bank of China, China Life Insurance Company and China Mobile are all the largest companies in the world within their respective sectors, by market capitalization. As China's leading companies are now listing at home, investors are queuing to buy their shares.

This is fundamentally a positive development. Stock markets play a crucial role in financial development, and Chinese savers need more choices. If they keep their money in savings deposits, inflation will erode its value. A thriving equity culture has spread among Chinese households, pushing daily turnover on Chinese exchanges to exceed Nasdaq levels in recent sessions.

However, the momentum that has built up in a short period has reached risky levels. Stocks in China are more expensive than in any other major market in the world, yet thousands of new accounts are being opened every day - more than 120 million stock-trading accounts and another 90 million mutual fund accounts have been opened so far. With so many first-time investors making windfall profits, the worry for Chinese authorities is that they will keep plowing funds into domestic stocks with stratospheric expectations. And if the stock market keeps inflating at this rate, the risks of a sharp correction will only increase.

This is why China's financial authorities - aiming to limit the supply of money pouring into the domestic market - have launched an initiative that allows the country's citizens to invest overseas through professionally managed funds. A growing number of Chinese fund-management companies, securities firms, banks and insurers are being qualified by regulators to offer overseas investment funds, under what is known as the Qualified Domestic Institutional Investor program.

At present, the QDII program is the only mechanism by which average Chinese citizens can invest abroad. But next year, China may allow individual citizens to directly purchase stocks listed on Hong Kong's exchange in a trial program that would likely spread to other markets. The hope is that these initiatives will not only help Chinese investors reduce risk by diversifying their holdings, but also bring a moderating force to the domestic market by diverting some funds overseas.

Thus far, Chinese investors have jumped at the chance to invest abroad. Four overseas-stock oriented funds have been launched in recent weeks. Many more funds are waiting their turn. I expect at least $90 billion to leave the country through the QDII program in the next year.

China has another reason to widen access to overseas markets - to cool its economy. There is simply too much money circulating in China, which is fueling inflation and over-investment. By letting Chinese citizens invest abroad, the country's leaders hope to achieve an economic soft landing.

The creation of a broader range of investment choices is a very important opportunity for China's citizens, as well as China's overall economic development. The question is whether the country's investors will be content with more earthbound returns from global markets.

Jing Ulrich is the chairwoman of China markets at a major American investment bank.