China loosens capital outflow to restore foreign investors’ confidence

Foreign funds holding their purse strings tight amid China’s recent tightening on capital accounts, statistics show

PUBLISHED : Thursday, 04 February, 2016, 11:56am
UPDATED : Thursday, 04 February, 2016, 7:02pm

Chinese financial regulators have relaxed restrictions on both capital inflow and outflow for foreign funds in a bid to restore the confidence of foreign investors after Beijing’s recent capital account tightening fuelled concerns about official policies.

Operators of the Qualified Foreign Institutional Investor (QFII) schemes, mainly overseas funds with QFII licenses and an aggregate quota of US$81 billion to trade China’s domestic stock and bond markets, will be granted greater freedom to withdraw their money from China, and each operator will no longer be subject to a fixed investment quota, the State Administration of Foreign Exchange (SAFE), China’s foreign currency gate keeper, said on its official website on Thursday.

“The lock-up period for a QFII fund is cut to three months from one year... and the money they withdraw from China should be below 20 per cent of their assets in China,” the document said, noting it is already effective.

Statistics show overseas investors are putting less money into the Chinese markets in recent months, despite Beijing’s attempt to encourage offsetting inflows, as its recent tightening measures in fighting capital flow scared some offshore investors, analysts say.

From Thursday, mainlanders using UnionPay debit and credit cards to purchase insurance products overseas will face caps of US$5,000 per transaction, as Beijing unveiled a new rule to curb capital outflows.

Iris Pang, a senior economist for greater China at Natixis SA in Hong Kong, said it was a “loosening signal” from the authorities.

“Some QFII operators want to close their products in recent months after China’s stock market meltdown, but they just found they could not get the approval from the authority and they always have repatriation difficulties...It seems SAFE is addressing these complaints now,” she said.

Thomas Fang Dongming, head of China equities at UBS and its QFII representative, said: “The relevant QFII regulators in China have been working to loosen control on this field, to make China’s equity markets more accessible.”

“It is still one of the top priorities to internationalise China’s capital markets, and the regulators have been pushing for A share’s inclusion in reputable global indices, although things have become a little tougher recently with China facing bigger capital outflow pressures.”

Under the current rules, a foreign investor with a QFII licence is subject to a monthly quota and window to withdraw their investment or earnings, an industry insider said.

The regulator has been mulling over the relaxation for more than two years. It originally planned to issue arrangements as early as last April, the source said .

“Many of our foreign investors are deeply concerned about the freedom for investing China, after the recent currency turmoil and China tightens control on capital accounts,” a Shanghai-based brokerage analyst with a state-owned brokerage said. “The MSCI will have another review for A-share inclusion this June, and it means a lot to Beijing.”