BEIJING, Sept 21, 2007 (AFP) - China will impose limits on the amount of money local investors can spend on Hong Kong stocks, an official said Friday, suggesting the city will not see the wave of funds originally expected.

The announcement is the latest change to a plan to let private investors buy directly into the Hong Kong stock market, which triggered initial expectations that the city would be flooded in liquidity.

"There will be investment limits for the scheme," Xia Lingwu, a spokesman with the China Banking Regulatory Commission, told AFP.

Liu Mingkang, the chairman of the commission, told the Financial Times there would be a "quota in general" which might be reassessed later, once it had been reached.

"They can lift and readjust the quota if necessary and appropriate -- it's a flexible ceiling," Liu said.

The State Administration of Foreign Exchange announced last month that mainland residents could invest an unlimited amount in Hong Kong stocks under the pilot scheme.

It was designed to ease excessive liquidity in China and give people a wider choice of investments, with some predictions that 100 billion dollars would hit the Hong Kong stock market.

Excessive liquidity is when there is too much ready cash floating around in the market, thereby tending to inflate prices.

"China is in a period like Japan in the 1970s and 1980s, where asset prices were very high due to abundant liquidity at home and fast economic growth," said Andy Xie, an independent Shanghai-based analyst.

Opening up for investment in Hong Kong would create an immense pull effect due to the generally lower asset prices there.

"It is like the force of gravity that causes water to flow to a lower altitudes," Xie said.

It would help China keep liquidity down at a time when the central bank has had to repeatedly tell banks to keep more money in reserve in order to keep cash from inundating the system.

However, the initially ambitious-looking plan to let investors put their money in Hong Kong shares has since been steadily adjusted, with apparently strict curbs on who can participate.

So far only Bank of China and Bank of China International are believed to have been given permission to handle the investment scheme.

Similarly, the respected business magazine Caijing reported Monday the plan would initially be open just to residents of Tianjin, a port city in north China where the scheme will undergo the first trial runs.

Delays in implementing the programme have triggered speculation that powerful government agencies opposed it.

The banking regulator denied that the programme was in direct jeopardy, but it is easy to see why some might not like it, according to observers.

"Of course the stock manipulators in the Chinese market will oppose it," said Xie. "Vested interest groups have immense influences in China's policy making and their main purpose is money."

The China Securities Regulatory Commission, too, could be concerned that a too-rapid outflow of funds from the mainland to Hong Kong could trigger a massive sell-off and bring about a much-feared collapse in the local bourse.

Hong Kong also is unlikely to welcome some of the longer-term effects of the scheme, not only because of the inherently destabilising nature of too much liquidity.

If valuations are driven too high, foreign investors might decide to pull out, to be replaced by Chinese investors, said Xie.

"Being international is an advantage Hong Kong currently enjoys. If foreign capital was driven out by Chinese capital, then Hong Kong would be no different from cities like Shanghai," he said.