Do China’s efforts to broaden investor access and internationalise yuan go far enough?
One-way Hong Kong to mainland bond connect initiative has sceptics questioning the way Beijing is trying to lure onshore investment
It was only a few years ago that Beijing was turning up its nose at the so-called barbarians who were banging on China’s door and begging to be allowed to climb on the nation’s economic boom and yuan appreciation bandwagon. The situation couldn’t be more different now.
In recent months, the Chinese government has spared no effort to convince outside investors to put money into China’s onshore equity and bond markets. It created a new channel enabling investors to buy into the US$9 trillion bond market, and it is widening existing portals to increase the inflow of money.
The one-way Bond Connect programme was launched earlier this week, allowing investors in Hong Kong to buy bonds in China’s interbank, without any quota limits. A day later, China said the quota for another investment scheme was increased to 500 billion yuan (US$73.6 billion) – almost as big as the total yuan deposit in Hong Kong.
China’s change in attitude comes as the country is evolving from a global growth darling into a risky emerging market grappling with an economic slowdown, mountains of unpaid debt and persistent capital outflow pressure.
Beijing’s heavy-handed intervention in the marketplace, including its draconian control over capital outflows, opaque tweaking of the yuan exchange rate regime and intolerance of any volatility beyond its control, has deterred many investors from rushing into China assets.
“Investors may hesitate when considering such factors in their decision-making and therefore hold their investment temporarily,” said Iris Pang, a Greater China economist at ING in Hong Kong.
The awkwardly crafted acronym RQFII, which seems to have much in common with Donald Trump’s infamous typo “Cofveve”, stands for “renminbi qualified foreign institutional investor” and is in itself a design stemmed from China’s capital account control and mistrust of “foreign players”.
As China entered the World Trade Organisation in 2001, it became apparent that China must also open up its capital market.
But instead of opening the market to all possible investors, China copied a temporary arrangement from Taiwan called QFII, imposing strict qualification requirements and letting only the world’s biggest investment houses buy into Chinese securities under a given quota from Beijing. By the end of June, China had authorised 283 “qualified foreign investors” to buy into China securities with a combined quota of $92.7 billion.
The renminbi QFII system started in 2011 when Beijing decided that holders of yuan outside the mainland should be permitted to buy onshore securities. The scheme was initially launched in Hong Kong under a quota of 20 billion yuan.
While China’s decision to raise the quota to 500 billion yuan from the current 270 billion yuan is understandable, widening the door doesn’t have a lot of real meaning if not many people are trying to get in, according to Larry Hu, chief China economist of Macquarie Securities.
“There was large capital flight last year...and the central bank tends to lure them back with RQFII,” Hu said. “Investors are reluctant to increase yuan assets at the moment given their expectation of [yuan] depreciation.”
In addition, the deliberate design of the Bond Connect’s one-way opening, allowing only Hong Kong investors to put their money into the mainland instead of the other way around, raised suspicion over whether China was trying to integrate its market with the world or taking a purposeful approach to luring funds to balance its outflow pressure.
As China widens the inward channel, its outward channel, the qualified domestic institutional investor (QDII) programme, has been shelved without any new quota being granted in the past one and a half years.
“Opening up should cover both inflows and outflows,” said Zhao Hongyan, an economist at Huatai Financing Holdings in Hong Kong. “Outflow restrictions, together with exchange risk, may dampen investors... and run against the long-term goals of yuan internationalisation and capital market opening up,” she added.