SHANGHAI (REUTERS) - China's foreign exchange regulator said on Tuesday (Sept 10) that it had decided to scrap quota restrictions on two major inbound investment schemes, as a weakening yuan and rising outflows prompt Beijing to seek to attract more foreign capital.

While underlining China's thirst for overseas funding as its economy slows amid a debilitating trade war with the United States, the move also appears largely symbolic, as two-thirds of the existing quotas remain unused.

China's State Administration of Foreign Exchange (SAFE) would remove quotas on the dollar-dominated qualified foreign institutional investor (QFII) scheme and its yuan-denominated sibling, RQFII, it said in a statement on its website.

It said the move would "make it much more convenient for overseas investors to participate in China's domestic financial markets, making China's bond and stock markets more broadly accepted by international markets".

The removal of quotas comes amid an escalating US-China trade war that threatens growth in the world's second-biggest economy.

Beijing hopes that foreign capital inflows could help to offset rising outflows and lend support to its yuan currency, which has dropped to its lowest levels against the US dollar since the onset of the global financial crisis in 2008.

Inflows could also help bolster China's balance of payments, as some analysts fear the country is slipping dangerously towards twin deficits in its fiscal and current accounts.

The removal "is a clear signal that policymakers want to encourage capital inflows", wrote Win Thin, Global Head of Currency Strategy at Brown Brothers Harriman.

"The corollary is that they are still very worried about capital outflows and so will make sure to avoid any steps that might increase them," he said.

China in January doubled the QFII quota to $300 billion, but only $111.4 billion of the limit had been used by foreign investors by the end of August.

China's securities regulator also published draft rules earlier this year that would combine the QFII and RQFII programmes while also simplifying access for overseas investors.

THE RIGHT DIRECTION

Jean-Charles Sambor, deputy head of emerging market fixed income at BNP Paribas Asset Management said that the scrapping of quotas was "another big step in the right direction".

"It is a further commitment to irreversible capital account opening and will be seen as positive by markets participants," he said.

China introduced the QFII scheme in 2002 and RQFII in 2011 as part of efforts to encourage foreign participation in its financial markets. But the channels have become increasingly overshadowed by the Stock Connect and Bond Connect schemes, which allow overseas investors to access China's onshore markets with no quotas.

The QFII deregulation comes as a growing number of global index publishers, such as MSCI, FTSE Russell and S&P Dow Jones Indices are adding China stocks and bonds into their benchmarks.

"Reforms such as today's, combined with ongoing index inclusion, ensure that China's capital markets continue to move into the global investment mainstream," said Justin Chan, Co-Head of Markets, Asia-Pacific, at HSBC.

Eugenie Shen, head of asset management group at Asifma, said that ending quotas was a "good way to preserve the attractiveness of the QFII and RQFII channels", noting that the schemes offered a broader range of investable securities than through Stock Connect.

Khiem Do, head of Greater China investments at Barings, said that the scrapping of quotas could help to encourage inflows into China's onshore stock and bond markets.

"At the end of the day whether foreign investors will invest more in China or not depends on the current and future fundamental outlook of the underlying economy, trend of corporate earnings, attractiveness of their yield and yield spreads, and the perceived strength or weakness of the (yuan)," he said in an emailed comment.

Despite the ending of QFII and RQFII quotas, SAFE made no moves on Tuesday to ease restrictions on the outbound Qualified Domestic Institutional Investor (QDII) scheme.

"It would equally be welcome if the QDII investment rules can also be relaxed," Do said.