China to lift curbs on foreign fund offshore investments, sources say

Crackdown on capital outflows and a weakening of the US dollar have provided Beijing with more policy flexibility, according to industry executives

PUBLISHED : Friday, 19 May, 2017, 10:22pm
UPDATED : Friday, 19 May, 2017, 10:22pm

China will lift a two-year suspension on foreign funds raising money in the country to invest overseas as early as June, people familiar with the matter said, a sign that Beijing is getting less anxious about capital outflow pressures.

Some industry executives said the expected resumption of the Qualified Domestic Limited Partnership (QDLP) programme may mean that an official crackdown on capital outflows and a weakening of the dollar have provided the authorities with more policy flexibility.

Neither the Shanghai Municipal Government Financial Services Office, which runs the QDLP scheme, nor the State Administration of Foreign Exchange (SAFE), which controls the capital account, responded immediately to requests for comment.

The QDLP programme allows foreign fund managers to raise money within a set quota from high net-worth Chinese investors through a wholly-owned onshore fund management company and invest the cash overseas.

Launched in 2013, QDLP was one of a handful of controlled schemes that allowed Chinese to invest money overseas. It was subsequently informally suspended in 2015 after the stock market crashed and lost around 40 per cent of its value.

The licences and accompanying quota had previously been issued in batches, with authorities expected to issue the long-awaited next round in coming weeks, said two people briefed by regulators on the matter.

One of these people said authorities will, however, be a “little cautious” granting only around half a dozen licences, these people said.

The quota will also be lowered from US$100 million per manager during the previous batches to between US$50 million and US$75 million this time round, one of these people and a third individual briefed on the matter said.

That could amount to between US$300 million to US$450 million in fund flows abroad.

The sources said SAFE must ultimately sign off on lifting the suspension.

But SAFE may be more comfortable doing so after the yuan rose 1 per cent against the US dollar this year after falling 6.5 per cent last year.

China’s foreign exchange reserves also rose in April for a third straight month, as stringent capital controls and a pause in the US dollar’s rally helped staunch outflows.

On Friday, SAFE said China’s cross-border capital flows were stabilising and improving.

Some foreign managers, such as insurance giant Allianz and Dutch manager Robeco, have positioned for the relaxation in curbs since late last year.

The opening up of the QDLP quota, though small, will also expand the range of investment options global private banks can offer their wealthy clients in China, industry officials said.

In 2015, BlackRock became the first traditional asset manager to receive the QDLP licence, joining a handful of other global funds, including Man Group and Och-Ziff Capital Management Group.

QDLP funds are private, meaning data is not publicly available on assets or performance, but industry insiders say they have seen strong demand as wealthy Chinese scrambled to hedge their exposure to the falling yuan by investing offshore.

A growing number of foreign financial institutions, including Aberdeen Asset Management, United States-based hedge fund Bridgewater Associates and Vanguard, have recently set up standalone money-management firms in China, as Beijing further deregulates the mainland fund industry.

Previously, foreign asset managers looking to distribute investment products in China had to operate through minority-owned joint ventures with domestic firms, but Beijing has been gradually loosening the reins.