China eases rules, widens US$222 billion inbound investment path, offering the renminbi as a safe haven against global volatility

·5-min read

China’s yuan-denominated assets will get a fresh catalyst this month from some policy measures to give foreign stock and bond managers wider access to the capital markets. That also means exposure to the second-best Asian currency in the past 12 months.

The central bank and market regulators have streamlined approval procedures for its inbound investment schemes, known by their QFII and RQFII acronyms, from November 1. They will also let foreign investors access a wider array of assets such as over-the-counter stocks, financial and commodity futures, and hedge funds, among others.

First announced in September, authorities will adopt universal criteria for approving foreign investors who apply for local currency to invest in the onshore market. The same will apply to investors seeking to deploy offshore yuan into local assets. They also promised to shorten the review process to 10 days from as long as 60.

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“That has lowered the entrance threshold and foreign inflows are expected to accelerate,” said Li Tianlu, an analyst at Capital Securities in Beijing. “It will increase the yuan’s appeal, and deepen market-oriented reforms in line with global practices.”

The measures will dismantle some barriers just as foreign interest is growing. Stocks and bonds are more appealing after they were added into global benchmarks tracked by the likes of MSCI, FTSE Russell and JPMorgan Chase, and the nation’s most valuable private companies including Ant Group come to the market.

Money managers have little to complain so far. The yuan strengthened 1.5 per cent in October. Last quarter, the local currency appreciated 3.9 per cent, its best in more than a decade. Over the past 12 months, it has risen 5.4 per cent, trailing the Taiwan dollar’s 6 per cent gain, according to Bloomberg data.

Stock capitalisation reached US$10 trillion for the first time since 2005, with the Shanghai Composite Index leading major world equity indices with a 9.7 per cent gain, as the economy rebounded from the Covid-19-induced crash in the first quarter.

“China has been stepping up efforts to open its stock and bond market,” said Qin Peijing, an analyst at Citic Securities. “The implementation of the new rules will prompt foreign investors to be more actively involved in China’s multi-tier capital market.”

China implemented the Qualified Foreign Institutional Investor (QFII) programme in 2002, which allows traders to convert foreign currencies into yuan to buy local stocks and bonds. The renminbi version or RQFII, came in 2011 to enable the use of yuan outside the country to invest at home.

Before quotas on both inbound programmes were officially scrapped in May, China had approved 292 QFIIs including Norwegian and UAE’s sovereign wealth funds with a combined quota of US$111.4 billion, and 230 RQFIIs with almost 723 billion yuan (US$108 billion) capacity at the end of August 2019.

In addition to financial derivatives, commodity futures and options, over-the-counter stocks, and hedge funds, offshore money managers will also be permitted to participate in margin financing, short selling and bond repurchases, authorities said.

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Despite a loss in September, Greater China-focused hedge funds have handed 20.8 per cent returns to investors so far this year, outperforming their global peers by a wide margin, according to Singapore-based index compiler Eurekahedge.

Investors, however, should be aware that the combined QFII and RQFII menu comes with pitfalls. Some private investment funds, sometimes known as “sunshine funds,” grew out of the unregulated corner of the shadow-banking sector.

Inexperience, or a lack of expertise, has exposed investors to deep losses in derivatives tied to the volatile market for commodities. One such episode was during crude oil’s historic plunge below zero in April.

On balance, foreign investors should be happy with the latest fine-tuning. China’s stock and bond markets are now the second largest in the world, and wider access and fewer restrictions on fund flows are among their top requests when the securities were included in global benchmark indices.

Onshore stocks now account for 4.1 per cent of the weight of the MSCI Emerging Markets Index and China bonds joined JPMorgan’s gauge tracking global debts last year. China’s stock and bond markets are both the world’s second biggest in terms of market caps.

Foreign holdings of Chinese stocks amounted to 2.75 trillion yuan by the end of September and foreign ownership of local bonds reached almost 3 trillion yuan, according to the central bank. Foreign inflows may reach as much as 300 billion yuan in 2020, according to the estimate by China Merchants Securities.

“Foreign investors have already become an important part of China’s markets,” said Wang Hanfeng, a strategist at China International Capital Corp. “They will continue to gain in size in the future.”

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