China eases curbs on foreign funds

Shares in China have been plunging, and the benchmark Shanghai Composite Index has tumbled 22 per cent this year, making it the world's worst performer.
Shares in China have been plunging, and the benchmark Shanghai Composite Index has tumbled 22 per cent this year, making it the world's worst performer.PHOTO: REUTERS

Move seen as bid to gain entry to MSCI's global stock indexes and draw foreign capital

HONG KONG • China yesterday relaxed restrictions on foreign funds as policymakers seek to gain entry to MSCI's global stock indexes and bolster the nation's financial markets after record capital outflows.

The State Administration of Foreign Exchange (Safe) said fund managers approved under its Qualified Foreign Institutional Investor (QFII) programme will no longer need to apply for quotas, with maximum allocations instead being linked to assets under management and subject to a ceiling of US$5 billion (S$7 billion). Open-ended funds will also be able to shift money in and out of the nation's stocks on a daily basis.

The Chinese authorities have been pushing for an MSCI endorsement - sending a delegation of regulators to Europe and the US last year to make the case for inclusion - as President Xi Jinping's government seeks to elevate the status of mainland markets on the world stage and make the yuan a more international currency.

Attracting foreign capital has taken on greater urgency in recent months after the yuan weakened and local shares tumbled, though analysts cautioned that the rule change is unlikely to attract major inflows any time soon and also does not guarantee MSCI inclusion.

"They want more dollars to come into China," said Mr Tim Condon, head of Asia research at ING Group in Singapore. "China risk aversion is elevated due to uncertainty about foreign exchange policy, so I expect little short-run impact from the measure. As currency uncertainty fades, the move will be positive for equities and fixed income."

While the easing addresses some of the issues highlighted by MSCI, remaining curbs include limits on the repatriation of assets. Safe also said it retains the authority to adjust rules for outflows based on market conditions.

The index provider decided to leave China's domestic shares out of its equity gauges last June, saying it would work with the country's regulators to establish policies that resolve the "remaining accessibility issues". Those included giving investors quotas commensurate with the size of their assets under management, improvements in liquidity and further clarification of share ownership rules.

Volatility in China's stocks and currency is likely to be another obstacle, said Mr Xia Le, the Hong Kong- based chief Asia economist at Banco Bilbao Vizcaya Argentaria.

The benchmark Shanghai Composite Index has tumbled 22 per cent this year, making it the world's worst performer, as traders unwound bullish bets on concern that valuations were too high given the economic slowdown.

The central bank has stepped up intervention in the foreign exchange market over the past month and tightened capital controls after the yuan slumped to a five-year low.

"The new rule makes it easier for foreign institutions to move their funds in and out of China, which was one of the hurdles thwarting an inclusion last year," Mr Xia said. "However, the chance for an inclusion is not significant this year, even though this change is in place, because China's financial markets will likely continue to be highly volatile in the near term."

The previous cap on institutional investments was US$1 billion, although officials had already allowed that limit to be breached when they gave Fidelity Investments Management (Hong Kong) a US$1.2 billion quota last year.

QFII funds can now be pulled from China after three months, down from a year, provided the net withdrawal in a month does not exceed 20 per cent of assets held at the end of the previous year, Safe said.

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A version of this article appeared in the print edition of The Straits Times on February 05, 2016, with the headline 'China eases curbs on foreign funds'. Print Edition | Subscribe