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China Scraps Foreign Investment Limit in Stocks and Bonds

Bloomberg News
China Scraps Foreign Investment Limit in Stocks and Bonds

(Bloomberg) -- China removed one more hurdle for foreign investment into its capital markets almost 20 years after it first allowed access.

Global funds no longer need approvals to purchase quotas to buy Chinese stocks and bonds, the State Administration of Foreign Exchange said in a statement on Tuesday. It removed the $300 billion overall cap on overseas purchases of the assets, about two-thirds of which remain unused.

It’s the latest push by Chinese authorities to increase use of the yuan in international transactions, and comes as they seek out more foreign capital to balance payments. Scrapping the investment quota is also another step in policy makers’ efforts to open up China’s financial system to the world.

It’s unclear how much fresh investment the latest moves will attract into China’s $13 trillion bond and $6.9 trillion equity markets, given that foreign investors had only used $111 billion of the $300 billion quota available to them through Aug. 30. There are also alternate routes of investment, including trading links with Hong Kong Exchanges & Clearing Ltd., that allow offshore money managers to trade stocks and bonds in China via the former British colony.

”It is certainly a positive and it underscores the fact that the trade war with the U.S. has a positive effect on China -- it is pushing its reform agenda more than expected,” said Adrian Zuercher, head of asset allocation for Asia Pacific at UBS Wealth Management. “We might not see immediate inflows, but the cap was an important roadblock for institutional investors which has now been removed.”

Foreign investors held 2 trillion yuan ($281 billion) of Chinese bonds and 1.6 trillion yuan of stocks onshore at the end of June, according to central bank data. The benchmark Shanghai Composite Index dropped 0.1% as of 9:48 a.m.

The process of granting overseas investors similar ease of access as local players started in 2000, when China was negotiating entry into the World Trade Organization. It picked up pace last year after U.S. President Donald Trump attacked China as a one-sided beneficiary of global commerce.

China began easing rules last year, when it removed lock-in periods and allowed investors who used the quotas to repatriate their money at any time. There had previously been limits on the amount foreigners could take out of the country in one go.

Separately, the country has allowed foreign banks and insurers to take controlling stakes in their local ventures. UBS Group AG, JPMorgan Chase & Co. and Nomura Holdings Inc. have all won approval for majority control of their local securities joint ventures, while Goldman Sachs Group Inc. and DBS Group Holdings Ltd. have applications pending.

Under the changes to the Qualified Foreign Institutional Investors and Renminbi Qualified Foreign Institutional Investors programs, foreigners need only to register before investing in Chinese securities, a move that will “make China’s bond and equity markets better and more widely accepted by international markets,” according to SAFE’s statement.

The latest move will play into the strength of quantitative investors because they perform best with high volumes of stocks that humans have a hard time analyzing, said Mike Chen, director of Dynamic Equity at Boston-based PanAgora Asset Management Inc. which has $45 billion of assets under management.

“If the quota is no longer there, you know you can just invest freely, and that means that the whole gamut of stocks and bonds within the Chinese investment universe is now open to foreign investors,” Chen said. “This is a welcome development and really plays into the quant strength,” given that quantitative trading benefits from higher volumes of stocks being traded.

Yet for some global funds, the uncertainty of getting money out of the country has been an impediment for inbound investment, bankers and analysts have said. One lawyer cites the example of a major fund that needed almost four months to get approval to repatriate investment proceeds to its headquarters under the QFII program a few years ago, at a time when the yuan was under depreciation pressure. The person asked not to identified discussing client matters.

“It is a gesture, trying to reduce red tape and reinforcing the message that they are continuing to open the Chinese capital markets,” said Gerry Alfonso, director of international business department at Shenwan Hongyuan Group Co. “It probably does not have a massive short term impact on stocks, but overall it is a good development.”

(Updates with investor comment in 12th paragraph. A previous version of this story corrected PanAgora’s assets under management.)

--With assistance from Helen Sun, Livia Yap, Gwen Everett and Nishant Kumar.

To contact Bloomberg News staff for this story: Lucille Liu in Beijing at xliu621@bloomberg.net;Jun Luo in Shanghai at jluo6@bloomberg.net;Amanda Wang in Shanghai at twang234@bloomberg.net;Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Candice Zachariahs at czachariahs2@bloomberg.net, Daniel Taub, Michael J. Moore

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