China to promote yuan by relaxing investment scheme rules: sources

22 Apr1:57 PM

[HONG KONG] China is set to enhance the convertibility of its yuan currency by allowing capital to be taken out on a daily basis from the largest investment scheme open to foreign investors, people with knowledge of the plans told Reuters.

This could strengthen the global standing of the yuan and support Beijing's push to have it included in the International Monetary Fund's basket of reserve currencies, alongside the dollar, euro, yen and pound.

Currently, foreign asset managers and banks investing in Chinese stocks and bonds through the US$150 billion Qualified Foreign Institutional Investor (QFII) programme can only move capital in and out of China on a weekly basis and are therefore restricted in their ability to manage and value funds.

But the changes now being reviewed by China's chief executive body, the State Council, would make the yuan convertible within the limits of the scheme and allow the cross-border flow of billions of dollars' worth of investments at a day's notice.

The reform could also increase the chances of Chinese stocks being represented in global benchmarks such as the MSCI Emerging Market Index.

The daily movement of cash in and out of China is currently allowed under the smaller, yuan-denominated RQFII scheme, which mainly targets a pool of yuan liquidity in offshore centres such as Hong Kong.

One of two sources briefed by Chinese regulators said the plan was to "align the RQFII and QFII schemes by allowing daily liquidity", adding the change was expected "imminently".

A second source briefed by regulators said the introduction of daily liquidity for QFII was one of several proposals being reviewed by China's State Council and could be pushed through in a matter of weeks.

Other reforms currently being considered, including lifting an informal $1 billion cap on individual firms' QFII quotas, could take longer, this person said.

The State Council did not respond to requests for comment.

As of March, foreign investors such as UBS, Goldman Sachs, Deutsche Bank, and Fidelity had invested US$72.1 billion via the QFII programme, according to data from China's currency regulator the State Administration of Foreign Exchange (SAFE).

SAFE did not respond to requests for comment.

The relaxation of the rules governing the investment scheme into China would mark a significant further opening up of the country's capital accounts.

While foreign investors can now trade Shanghai stocks directly via the recently-launched Hong Kong-Shanghai Stock Connect link-up, the quota-based schemes are the only way to buy Chinese bonds and other mainland financial products. "QFIIs are allowed to place far larger trades when accessing the market, so were firms able to move half a billion U.S. dollars in and out of China at a day's notice, this is far more than can be done through RQFII or Stock Connect and would show a real commitment to increasing the convertibility of the yuan,"said Stephen Baron, deputy director at investment consultancy Z-Ben Advisors in Shanghai.

China nearly doubled the value of the 12 year-old QFII scheme from $80 billion to US$150 billion in 2013, making it the largest of China's inbound investment programmes, compared with RQFII's US$130 billion and Stock Connect's US$48 billion.

Only half of the available QFII quota is used, however, due to the weekly liquidity constraint.

Last month, China's central bank governor Zhou Xiaochuan said the QFII scheme was not sufficiently flexible and more reforms were planned. He did not provide specific details.

According to an investor presentation briefing given by the China Securities Regulatory Commission last month and seen by Reuters, these plans include "more flexibility on redemption and repatriation" of funds invested under the existing quota-based programmes.

The CSRC did not respond to requests for comment.

REUTERS