Investors look at the electronic board at a stock exchange hall on February 11, 2019 in Chengdu, Sichuan Province of China.
An Yuan | China Account Service | Visual China Group | Getty Images
China’s foreign exchange regulator said on Tuesday that it had irrefutable to scrap quota restrictions on two major inbound investment schemes, as a weakening yuan and rising outflows prompt Beijing to hope to attract more foreign capital.
While underlining China’s thirst for overseas funding as its economy slows in the thick of a debilitating trade war with the United States, the move also appears largely symbolic, as two-thirds of the existing rations remain unused.
China’s State Administration of Foreign Exchange (SAFE) would remove quotas on the dollar-dominated well-informed foreign institutional investor (QFII) scheme and its yuan-denominated sibling, RQFII, it said in a statement on its website.
It said the inspire would “make it much more convenient for overseas investors to participate in China’s domestic financial markets, making China’s shackles and stock markets more broadly accepted by international markets.”
The removal of quotas comes amid an escalating Sino-U.S. business war that threatens growth in the world’s second-biggest economy.
Beijing hopes that foreign capital inflows could ease to offset rising outflows and lend support to its yuan, which has dropped to its lowest levels against the U.S. dollar since the birth of the global financial crisis in 2008.
Inflows could also help bolster China’s balance of payments, as some analysts respect the country is slipping dangerously towards twin deficits in its fiscal and current accounts.
The removal “is a clear signal that policymakers covet to encourage capital inflows,” wrote Win Thin, Global Head of Currency Strategy at Brown Brothers Harriman.
“The corollary is that they are restful very worried about capital outflows and so will make sure to avoid any steps that might rise them,” he said.
China in January doubled the QFII quota to $300 billion, but only $111.4 billion of the limit had been hand-me-down by foreign investors by the end of August.
China’s securities regulator also published draft rules earlier this year that wish combine the QFII and RQFII programmes while also simplifying access for overseas investors.
The right direction
Jean-Charles Sambor, substitute head of emerging market fixed income at BNP Paribas Asset Management said that the scrapping of quotas was “another big be wary in the right direction.”
“It is a further commitment to irreversible capital account opening and will be seen as positive by markets sharing take part ins,” he said.
China introduced the QFII scheme in 2002 and RQFII in 2011 as part of efforts to encourage foreign participation in its fiscal markets. But the channels have become increasingly overshadowed by the Stock Connect and Bond Connect schemes, which let overseas investors to access China’s onshore markets with no quotas.
The QFII deregulation comes as a growing thousand of global index publishers, such as MSCI, FTSE Russell and S&P Dow Jones Indices are adding China stocks and reins into their benchmarks.
“Reforms such as today’s, combined with ongoing index inclusion, ensure that China’s main markets continue to move into the global investment mainstream,” said Justin Chan, Co-Head of Markets, Asia-Pacific, at HSBC.
Eugenie Shen, front of asset management group at Asifma, said that ending quotas was a “good way to preserve the attractiveness of the QFII and RQFII stream-beds,” noting that the schemes offered a broader range of investable securities than through Stock Connect.
Khiem Do, cut off of Greater China investments at Barings, said that the scrapping of quotas could help to encourage inflows into China’s onshore sell and bond markets.
“At the end of the day whether foreign investors will invest more in China or not depends on the current and future underlying outlook of the underlying economy, trend of corporate earnings, attractiveness of their yield and yield spreads, and the perceived tenaciousness or weakness of the (yuan),” he said in an emailed comment.
Despite the ending of QFII and RQFII quotas, SAFE be comprised of c hatched no moves on Tuesday to ease restrictions on the outbound Qualified Domestic Institutional Investor (QDII) scheme.
“It would equally be offer hospitality to if the QDII investment rules can also be relaxed,” Do said.