China eases grip on outflows, lifts outbound investing quota

SHANGHAIChina granted additional quota for funds to invest in securities overseas for the first time in three years, easing capital curbs and further opening its US$40 trillion (RM160 trillion) financial sector.

The Qualified Domestic Institutional Investor (QDII) quota was bumped to US$98.33 billion as of April 24 from US$89.99 billion, the first increase since March 2015, data from the State Administration of Foreign Exchange showed yesterday. The change followed similar approvals, which more than doubled the quota for two outbound portfolio investments, announced earlier.

A strengthening currency gave policymakers the confidence to allow more capital to flow out of the country, easing a policy of tough restrictions. The move also fits in with President Xi Jinping’s push for deeper integration with the global financial system, an initiative that’s seen China unveiling plans to further open up to foreign competition even as trade tensions flared.

“This shows the policymakers are no longer concerned with yuan weakness and are confident that the currency market will withstand some capital outflows,” said Gao Qi, Singapore-based strategist at Scotia-bank. “China will continue to relax capital curbs — it will allow more outflows while seeking to attract foreign investors onshore. But the pace will be gradual, and the policymakers will have a risk averse attitude.”

People’s Bank of China governor Yi Gang pledged to accelerate the market opening in a speech earlier this month, including widening foreign banks’ access, increasing daily quotas in stock connects and removing restrictions on joint securities firms to allow them to take majority stakes in local joint ventures. Some ownership limits would be lifted as soon as June 30, Yi said.

“Opening-up is a buzz word this year, and the latest policy relaxations show the government’s commitment to it,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp in Singapore. “Regulators’ mindset has shifted from expanding inflows to keep- ing the portfolio flows more balanced, now that the yuan stabilises.”

“The move shows China is confident that the yuan will continue to appreciate, so that it has the policy leeway to allow domestic investors to diversify more into the overseas assets,” said Iris Pang, economist at ING Bank NV in Hong Kong.

“This is part of China’s efforts to further liberalise the financial sector,” said Khoon Goh, head of Asian research at Australia & New Zealand Banking Group Ltd in Singapore. “With capital flows in better balance, and the prospect of a structural increase in foreign inflows due to the upcoming MSCI equity index inclusion and Bloomberg Barclays Global Aggregate Bond Index inclusion from next year, the authorities see room to allow some increase in outflows to offset the pending inflows.”

“This is in part a reflection of confidence that portfolio flows are getting more balanced and outflows risks have reduced meaningfully,” said Christy Tan, Singapore-based head of Asia markets strategy at National Australia Bank Ltd. “Some capital controls will likely remain in place, as a continued safeguard in case of shocks.”

The onshore yuan declined 0.2% to 6.3202 per dollar at 6pm in Beijing yesterday, after touching 6.3240, the weakest level in a month.

The QDII programme applies to domestic Chinese funds as well as foreign firms that are licensed to operate in China. — Bloomberg