China widens exit for offshore stock investment plans in Hainan, Chongqing as yuan gathers strength against global currencies

Beijing plans to expand two pilot programmes that allow residents to buy overseas equities under quotas amid investors’ increasing demand for global asset allocation.

A free-trade zone in the southern Chinese province of Hainan, and the megapolis of Chongqing will begin trial runs of the qualified domestic limited partner (QDLP) and qualified domestic investment enterprise (QDIE) schemes soon, according to a Sunday notice by state news agency Xinhua, citing unidentified officials with the State Administration of Foreign Exchange (SAFE).

Shanghai, Shenzhen and Beijing, the three cities where the programmes have already been implemented, will see an increase in number of players and distribution of fresh quota, Xinhua said, without providing details on the number of licences and or amount of quota. To date, the forex regulator has set a US$5 billion quota for each of the schemes.

“The investment programmes, under the current quota system, represent just a small portion of China’s foreign-exchange reserve, but the decision showed that Beijing is taking an active stance in managing fund flows,” including to stem capital flight, said Wang Feng, chairman of Shanghai-based financial services company Ye Lang Capital. “The regulators are likely to take a slow approach in granting fresh quota.”

Shanghai pioneered the reform on QDLP and QDIE programmes in 2013, under which foreign hedge funds are allowed to raise renminbi in China’s commercial hub through local branches and then convert the capital into foreign currencies for investing in overseas equities. Shenzhen followed suit, launching a similar QDIE programme two years later approved to engage in a broader range of investments including private equity, hedge funds and real estate.

Still, the Chinese currency administrator had maintained a tight grip on programmes to liberalise offshore investments by Chinese funds and individuals, handing out limited quotas to select foreign institutions over the past, on concern that excessive outflows could lead to capital flight.