Beijing continues to keep the lid tight on outbound capital flows

Country’s foreign exchange regulator has not increased QDII quota for last 15 months

PUBLISHED : Monday, 27 February, 2017, 10:17pm
UPDATED : Monday, 27 February, 2017, 10:55pm

China’s State Administration of Foreign Exchange continued to keep a tight leash on the country’s outbound investment schemes by not releasing any fresh quota as it continued to take more steps to stem capital outflows after foreign exchange reserves dropped to a new low.

Contrary to expectations the SAFE decided not relax the threshold for the Qualified Domestic Institutional Investors scheme, which allows mainland institutions such as mutual funds to raise capital from local investors in yuan before converting them into foreign currencies for purchasing overseas equities and bonds.

The outstanding investment quota under the QDII scheme stood at US$89.99 billion by the end of February, according to data published on the SAFE website on Monday.

The quota for QFII, or Qualified Foreign Institutional Investor, which allows foreign funds to trade mainland equities and bonds, on the other hand was expanded to US$1.9 billion in February from US$89.2 billion.

The quota for RQFII, which allows foreign funds to undertake equities and bond trading with yuan, was increased by 11.5 billion yuan to 541.1 billion yuan (US$787.5 million).

The appetite for overseas assets, particularly those linked to the US markets against the backdrop of an interest rate hike, is quite strong, said Yim Fung, chairman of Guotai Junan International, a Hong Kong based brokerage and asset manager. Yim made the comments during a recent interview with the South China Morning Post.

Beijing’s moves also partly seem to be to shore up the renminbi, which dropped nearly 6.6 per cent against the US dollar in 2016, making the worst dip since 1994.

China’s foreign exchange reserves, a proxy indicator of the fund outflows, dropped to US$2.998 trillion in January, after seven consecutive monthly declines since July.

The SAFE said capital outflow pressures “have remarkably alleviated since early this year”, as cross-border inflows and outflows are “becoming more balanced”.

Bets on the yuan have turned slightly bearish, but the positioning is still close to neutral, a recent Reuters poll of 16 market participants showed.

Reflecting the bearish views on the currency in global markets, the offshore one-year non-deliverable forwards contracts, a forward-looking proxy traded at 7.095, 3.01 per cent weaker than the midpoint.

On Monday, the onshore yuan in Shanghai ended 4 points stronger to 6.8714 against the US dollar in evening trade.