PBOC announces full yuan convertibility for Guangdong, Tianjin and Fujian, but with conditions attached

PBOC announces yuan will be freely convertible in three free-trade zones with an annual US$10m cap, but analysts criticise the move as not going far enough

PUBLISHED : Friday, 11 December, 2015, 11:14pm
UPDATED : Friday, 11 December, 2015, 11:16pm

The People’s Bank of China announced Friday that the yuan would be freely convertible for corporations registered in three Chinese free-trade zones in Guangdong, Tianjin and Fujian - albeit with conditions attached that have some analysts criticising the move as not going far enough.

The key change comes at a time when the yuan has touched four-year lows. The onshore yuan ended down 175 basis points on Friday, or 6.4553 against the dollar, while the offshore yuan touched 6.5322.

The central bank attached two key qualifications for the opening: corporations should not be engaged in certain sensitive industries on a government “negative list”, and the convertibility will be subject to an annual limit of US$10 million.

“[The announcement] goes against what the central bank is doing at the moment. They have suspended RQDII and QDIE, and are conducting investigations into how QDII and QFII quotas are used,” said Theodore Shou, international chief investment officer at Skybound Capital. “It has become extremely difficult for anyone to take money aboard, whether it be mainland banks, domestic fund houses or personal investors. It’s just a gesture to show they are not taking a hard line against yuan liberalisation measures.”

RQDII, QDII, and QDIE are variations of state-regulated programmes that allow Chinese investors to invest in foreign securities under quotas, while QFII is a state-run programme which governs onshore foreign institutional investment.

A foreign exchange strategist at a leading investment bank said: “It seems to me [PBOC] is looking to promote inflows. I don’t think it’s a big bang thing in terms of new measures. They are happy to introduce programmes that promote in-bound capital as they have shut down anything that leads to outflows.”

The landmark announcement has been 15 years coming as China’s leadership first signalled its willingness to eventually liberalise the capital account upon becoming a member of the World Trade Organisation in 2001. The commitment was reiterated when the former Chinese president Hu Jintao came into power.

But the limited opening falls short of the goal to achieve full convertibility across the nation by 2016, as promised by central bank governor Zhou Xiaochuan in 2011 when the yuan liberalisation process began in earnest under his leadership.

Nonetheless, the current package has come with other sweeteners, including support for banks located in the free trade zones to develop forex-related derivatives businesses; simplified procedures for registered corporates to issue offshore yuan-denominated debt; and the opportunity for Hong Kong and Macau institutions to develop yuan-denominated cross-border financing, credit guarantees and asset sales from the zones.

Chi Lo, senior economist, greater China at BNP Paribas Investment Partners, said the central bank’s action was controlled and limited in line with Beijing’s usual practise and with market reality.

“The mainland banking and corporate sectors are not yet robust enough for full convertibility and the head-on competition that will bring. There is no evidence to show they are strong enough to withstand the shocks.”

Shou of Skybound Capital said US$10 million was not a meaningful figure for any corporation willing to take advantage of the policy changes. He added that Beijing’s willingness for further opening is restrained by the still elevated valuation of the yuan against the US dollar.

Given the yuan’s continued strength against the euro, Japanese yen and Korean won, it would require a further 20 to 40 per cent depreciation against the US dollar to put it on an equal footing, according to Lo of BNP Paribas. However, such a depreciation would not be acceptable given international pressure, with current market expectations being only a further 3 per cent depreciation in 2016.

Despite the downbeat comments, Aaron Boesky, chief executive of hedge fund Marco Polo Pure Asset Management, sees some value from the opening. “A six-year old could see it is time to lower US exposure and increase Chinese exposure. Never mind short term volatility, the medium term is where the big money is at here,” he said.

“The world’s largest economy [US] will be raising rates from its all time low. The world’s second largest economy [China] has just cut rates six times in less than a year from an all time high to an all time low. Imagine the world’s largest population and an entire stock market full of companies refinancing to what has just become an all time low benchmark rate.”