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China widens exit for offshore stock investment plans in Hainan, Chongqing as yuan gathers strength against global currencies

·4 min read

Beijing plans to expand two pilot programmes that allow residents to buy overseas equities under quotas amid investors' increasing demand for global asset allocation.

A free-trade zone in the southern Chinese province of Hainan, and the megapolis of Chongqing will begin trial runs of the qualified domestic limited partner (QDLP) and qualified domestic investment enterprise (QDIE) schemes soon, according to a Sunday notice by state news agency Xinhua, citing unidentified officials with the State Administration of Foreign Exchange (SAFE).

Shanghai, Shenzhen and Beijing, the three cities where the programmes have already been implemented, will see an increase in number of players and distribution of fresh quota, Xinhua said, without providing details on the number of licences and or amount of quota. To date, the forex regulator has set a US$5 billion quota for each of the schemes.

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"The investment programmes, under the current quota system, represent just a small portion of China's foreign-exchange reserve, but the decision showed that Beijing is taking an active stance in managing fund flows," including to stem capital flight, said Wang Feng, chairman of Shanghai-based financial services company Ye Lang Capital. "The regulators are likely to take a slow approach in granting fresh quota."

Shanghai pioneered the reform on QDLP and QDIE programmes in 2013, under which foreign hedge funds are allowed to raise renminbi in China's commercial hub through local branches and then convert the capital into foreign currencies for investing in overseas equities. Shenzhen followed suit, launching a similar QDIE programme two years later approved to engage in a broader range of investments including private equity, hedge funds and real estate.

Still, the Chinese currency administrator had maintained a tight grip on programmes to liberalise offshore investments by Chinese funds and individuals, handing out limited quotas to select foreign institutions over the past, on concern that excessive outflows could lead to capital flight.

Distributions of the new QDLP and QDIE licenses and quotas were ways for the currency regulator to slow capital flight, particularly when the exchange rate of the renminbi was under depreciation pressure against global currencies, which typically prompts people to seek shelter in hard currencies and offshore assets. China's foreign exchange reserves, the largest in the world, shrank slightly to US$3.128 trillion at the end of October.

The yuan has strengthened against the US dollar in recent months, which eases regulators' concerns about capital outflow, giving them the confidence to further expand the scope of the QDLP and QDIE programmes, analysts said. The renminbi rose to 6.59 yuan per US dollar, the strongest level in 29 months, as China's economy - the first to emerge from the coronavirus lockdown - looks likely to be the only major economy to grow this year.

Global asset managers are increasingly looking to the massive savings by China's onshore investors who hope to diversify their assets worldwide.

Last week, Pictet Asset Management, the asset management arm of Geneva-based Pictet Group, opened a wholly foreign-owned enterprise in Shanghai that paved a way for it to raise QDLP funds on the mainland.

"The global macro environment is not without challenges but given the Group's financial strength and our long-term commitment to the China market, we remain confident that now is the time for us to take this important step," said Pictet Group's senior partner Renaud de Planta.

The QDLP and QDIE evolved from the Qualified Domestic Institutional Investor (QDII) scheme, another quota-based investment scheme that allows China's mutual funds to raise money from onshore investors before using them to buy foreign equities and bonds. In September, SAFE granted fresh quotas under its QDII scheme for the first time since April 2019. Last month, Xinhua said fresh quotas worth US$10 billion would be issued in several batches under QDII scheme.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.