China says multiple currencies can be used in cross-border fund scheme

A clerk counting 100 Chinese yuan banknotes at a branch of China Merchants Bank.
A clerk counting 100 Chinese yuan banknotes at a branch of China Merchants Bank.PHOTO: REUTERS

HONG KONG (REUTERS) - Fund investments under a landmark new scheme between China and Hong Kong will be able to be denominated in yuan or other currencies, a Chinese regulator said on Friday, a big step in liberalizing its capital account and a major departure from existing schemes.

The mutual fund recognition scheme launched on July 1 enables funds domiciled in Hong Kong and China to be sold in each others' markets, and is the latest landmark initiative connecting markets in Hong Kong and the mainland as China allows more access to overseas investors.

The decision to allow those investments to be denominated in multiple currencies other than the yuan marks a departure from other such schemes such as the Hong Kong-Shanghai stock trading link launched last November, which operates in yuan and the Hong Kong dollar only.

Other existing schemes to buy Chinese assets such as the qualified foreign institutional investment program and its yuan counterpart are only denominated in U.S. dollars and the yuan respectively.

The announcement on Friday at a regulatory conference in Hong Kong comes as China pushes to internationalise the yuan, also known as renminbi, and have it included in the IMF's basket of reserve currencies.

"Fund inflows and outflows can be in renminbi or in foreign currencies," Ye Haisheng, deputy director-general of China's State Administration of Foreign Exchange, told a regulatory conference in Hong Kong.

"Currency conversions can be done in Hong Kong or mainland. It's very liberalized as we don't differentiate or restrict currency types," Ye said.

Friday's announcement clarifying the rules of the scheme comes amid heavy losses in the mainland markets, with stocks in Shanghai falling 7 per cent in opening trade. Benchmark indexes have fallen more than a quarter from June 12 highs.

Funds sold under the recently launched scheme will also not be subject to individual quota approvals but rather an overall limit, Ye said.

The China Securities and Regulatory Commission (CSRC) said on July 1 that the initial overall quota for mutual fund recognition would be 300 billion yuan ($48.35 billion) in each direction.

A CSRC official on Friday also said that the regulator is mulling adding additional products such as exchange traded funds to the mutual fund recognition scheme.