China continues to try to take steps to open its markets – if not so much the yuan which has to remain firmly behind the Chinese firewall to avoid an FX-driven capital flight panic – to the rest of the world, or rather, to US-based buyers of Chinese stocks and bonds.
To that end, overnight Beijing eliminated a rule that previously required approvals to purchase quotas to buy Chinese stocks and bonds. The change was announced in a statement by the State Administration of Foreign Exchange on Tuesday, Bloomberg reported.
China’s SAFE removed the $300 billion overall cap on overseas purchases of the assets in the latest push by Chinese authorities to increase the use of the yuan in international transactions, if not to further internationalize the yuan whose “fair value” remains strictly the purview of the PBOC. As Bloomberg notes, about two thirds of the cap had remained unused at the time. The move also comes at a critical time, just as China seeks foreign capital to reverse its soon-to-be-negative balance of payments.
Yet while China can claim it is doing everything in its power to open up its markets to foreign investors, some ask if this is just another purely optical move since only about $111 billion of the current $300 billion quota was being met. It is therefore unclear whether the rule change will attract any new capital to the country’s $13 trillion bond and $6.9 trillion stock markets. Furthermore, there already exist “alternate” routes for investing in China, such as trading links with Hong Kong Exchanges & Clearing, which allow offshore investors to trade stocks and bonds in China via the former British colony.
Ding Shuang, chief China and North Asia economist at Standard Chartered Bank said: “The move is more symbolic and won’t trigger significant capital inflows. But it’s a good gesture for the officials to make, as the 70th anniversary of the People’s Republic of China’s founding is approaching and there’s a lack of positive development in the trade talks with the U.S.”
In total, according to the PBOC foreign investors held 2 trillion yuan in Chinese bonds and 1.6 trillion yuan of stocks onshore at the end of the June.
China started trying to grant overseas investors ease of access to its markets in 2000, when it was trying to negotiate entry into the World Trade Organization. It has continued since President Donald Trump has called the country a ” one-sided beneficiary of global commerce.”
Beijing first eased rules last year, removing lock in periods and allowing investors who had used the quote to repatriate their money at any time. Previously, there had been controls on how much investors were allowed to take out of the country at once. The country has also allowed foreign banks and insurers to take controlled stakes in some local ventures. For instance UBS Group, JPMorgan and Nomura Holdings all won approval for majority control of their local securities joint ventures.
The changes to the Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) programs means that foreigners only need to register before investing in Chinese securities.
SAFE believes the move will “make China’s bond and equity markets better and more widely accepted by international markets.”
As Gerry Alfonso, director at Shenwan Hongyuan Group concluded: “It is a gesture, trying to reduce red tape and reinforcing the message that they are continuing to open the Chinese capital markets. It probably does not have a massive short term impact on stocks, but overall it is a good development.”