Beijing gives US firms 250-billion- yuan quota to invest in China’s capital markets
Beijing has given the US a quota of 250 billion yuan (HK$300 billion) to invest in China’s capital markets through offshore yuan, a senior central bank official said on Tuesday.
Through the renminbi qualified foreign institutional investor scheme (RQFII), US companies can use yuan accumulated offshore to tap China’s capital markets as Beijing embraces closer economic cooperation with the United States.
The step, announced by People’s Bank of China deputy governor Yi Gang at a briefing of the China-US Strategic and Economic Dialogue, further opens the domestic capital market.
The RQFII mechanism, launched in December 2011 to widen investment channels into the mainland, allows qualified investors to invest in securities and bond markets within quotas.
China’s central bank tightens reserve requirements for offshore yuan banks
The quota for the US seems to be the second largest offered to a jurisdiction. By the end of March, Beijing had allowed an accumulated quota of 1.21 trillion yuan to 16 jurisdictions including Hong Kong, South Korea, Singapore, France, Germany and Britain. Hong Kong holds the biggest quota, of 270 billion yuan.
The yuan-backed scheme is a cousin to the qualified foreign institutional investor programme, denominated in the US dollar and launched in 2002. They are among the few ways in which foreign investors can tap the mainland’s onshore capital market.
Observers said the RQFII quota for the US was symbolic, given expectations of an interest rate increase by the US Federal Reserve as early as this summer could prompt capital outflow from China. The Fed last raised rates in December.
“The quota doesn’t necessarily mean that exact amount of capital will flow to China immediately,” said Yu Pingkang, chief economist of Changjiang Pension Insurance. “The real impact on China’s capital market will be limited, like a splash in the sea.”
The PBOC’s Yi said it was prepared for a Fed interest rate rise and would monitor the pace and strength of any increases.
Offshore yuan borrowing cost goes negative for the first time
He said China took a comprehensive perspective in reading such moves. On the one hand interest rate increases by the Fed, which would indicate recovery in its economy, might benefit China. On the other hand, they might trigger capital flow to the US as investors sought better returns – which would put pressure on emerging market currencies.
Yi said the PBOC had good communications with the Fed.
On the foreign exchange front, Yi said the market played a decisive role for China. The forex mechanism was stabilising and becoming more transparent and the market better understood the mechanism was based on demand-and-supply with reference to a basket of currencies.
Yi said a yuan clearing bank would be established in the US.
ANZ Bank said the US appeared more worried about Chinese policies having the potential to cause global financial market volatility, than about the weakening of the yuan exchange rate itself. Ironically, it was Beijing’s interventionist approach to stabilising the currency that had impressed the US, ANZ said.
