Beijing will cap a program allowing its citizens to invest in Hong Kong's stock market, regulators said on Friday, scaling back an earlier aggressive plan to open a gateway for its capital accounts.

The prospect of a new infusion of a wave of cash drove the index of Hong Kong-listed shares up by nearly 9 percent on Aug. 20, the day the scheme was unveiled.

But shares on Asia's largest bourse after Tokyo took the news in stride on Friday, sliding just a tad, while Chinese stocks listed in Hong Kong hit a record in early morning trade, and were holding steady at midday.

The comments were the latest in a series by Chinese officials pointing to the disagreements on how to implement the scheme.

Investors had expected Beijing to impose an initial quota, as it has on other new investment programmes, until regulators work out out of the plan in coming months.

Longer term, investors in Hong Kong remain upbeat because outflows will likely increase as Beijing gradually loosens capital controls -- an oft-stated aim of policy-makers, who want to offset a bulging trade surplus amid inflationary concerns.

The direction is clear, even though there're questions about timetables and procedural steps, said William Fong, a fund manager at Baring Asset Management.

This will take time, but it won't change our investment strategy. We've been bullish on H shares and red chips.

A spokesman for the China Banking Regulatory Commission confirmed on Friday that Chairman Liu Mingkang had said there would be no limit on investments by individuals. But there would be tight controls on the total amount invested through the scheme, the FT reported.

State newspapers have reported that Beijing would curtail the amounts that individual investors would be allowed to plough into stock in Hong Kong, although the reported amounts vary greatly.

CAPITAL MUST NEEDS FLOW

China loosened its capital controls in August to allow residents to invest directly in Hong Kong.

But the programme -- dubbed the Hong Kong through train -- has since been dogged by government infighting that broke out after it was announced, bankers say.

The authorities must have realised the previous plan was too bold, and they'd better scale back a little bit and resort to a gradual approach, said Zhang Yanbai, an analyst at BOC International in Beijing.

With a pivotal Communist Party Congress in mid-October potentially signifying a reshuffle of key posts, most market watchers don't expect resolution of the apparent disputes anytime soon.

Some officials fear too much money could flood out of China, sapping support for the local stock market. Others worry that novice investors could lose money if the Hong Kong market, which has risen sharply on the prospect of an influx of Chinese money, suffered a sharp correction.

The State Administration of Foreign Exchange, the currency regulator, sees the pilot programme as a way of generating capital outflows to reduce China's overall balance of payments surplus and so reduce upward pressure on the yuan.

Now, Liu said there would be a quota in general and when that was reached, the State Administration of Foreign Exchange would reassess activity in the market.

They can lift and readjust the quota if necessary and appropriate -- it's a flexible ceiling, he told the Financial Times.

Chinese officials refused to disclose the level of the quota but it is estimated to be lower than the $100 billion anticipated by the Hong Kong market, the FT said.

The launch of the scheme seems to be taking longer than expected in the earlier press reports, perhaps understandably because the implementation details need to go through a co-ordination process, Joseph Yam, the chief of Hong Kong's de facto central bank, said in a weekly column published on Thursday.

In any event, I have little doubt that it is in the interest of the mainland to start the train running. It is important for the mainland to induce an orderly outflow of capital on a meaningful scale.

China Investment