Banks may have missed out completely in the latest round of outbound investment quotas approved by Beijing but they will likely be granted more leeway in future as China moves to further liberalise its capital account, economists and analysts say.
After a long hiatus, China in late April relaxed its capital controls, with the State Administration of Foreign Exchange (Safe) approving $8.34 billion-worth of new qualified domestic institutional investor (QDII) quotas.
Out of that total, $5.97 billion was granted to 17 securities firms. Lifers lagged with $1.99 billion granted to five insurance companies and the rest going to trust companies. Banks got zilch (see table).
The QDII programme, first introduced in 2006, is an avenue for approved Chinese investors to invest overseas under China’s system of capital controls. The scheme was unofficially suspended in 2015 amid concerns over possible capital flight and a weaker currency, along with a sister version that targets renminbi-denominated products bought in overseas markets and other outbound investment programmes.
Now the QDII programme has been restarted, it seems institutional investors are not getting a lot out of the new quotas. (AsianInvestor defines institutional investors as financial intermediaries such as banks, insurers, pensions and endowments, which have well-defined purposes separate from purely investing).
One possible reason for it is that the regulator remains concerned about managing the capital account and wants to prevent huge capital outflows potentially triggered by institutional investors, Xia Le, Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA, told AsianInvestor.
“Institutional investors have a much larger [investable assets] ... Large amounts of money may go out at one time. They can move their money out faster … [while] asset managers have to raise money from the public [before investing overseas],” he said.
Joyce Liang, head of Asia Pacific Credit Research at Bank of America Merrill Lynch (BAML), is more non-committal. For her, it is unclear whether the disproportionate sharing out of new quotas was a conscious decision on the part of Safe or simply a case of squeaky wheels getting the grease because asset managers were more aggressive in their quota applications.
However, both believe that more QDII quotas will come as China continues to liberalise its capital account.
In addition, it is in the interests of regulators to grant more quotas to institutional investors to diversify their asset allocations and meet the capital needs of Chinese companies overseas.
A lot of the QDII holders prefer to invest in dollar bonds issued by Chinese companies. Giving more quotas to QDII holders, be they institutional investors or asset managers, can help to drive this market, Liang told AsianInvestor.
Besides QDII China has moved to reopen other outbound investment schemes, or at least hinted at it.
On May 3, the People’s Bank of China (PBoC) released stricter rules on Renminbi qualified domestic institutional investor (RQDII), signalling that the RQDII programme will also restart soon.
RQDII holders are banned from converting renminbi into foreign currencies under the scheme for overseas investment, effectively meaning they can only invest in offshore renminbi products. They are also required to submit their investment details to the central bank and are subject to the PBoC’s macro prudent assessment, according to the rules.
Safe said on April 24 that the approved quota for the Shanghai-based Qualified Domestic Limited Partnership (QDLP) and the Shenzhen-based Qualified Domestic Investment Enterprise (QDIE) had been increased to $5 billion each and would steadily promote the pilot programmes.
The QDLP and QDIE schemes are variations of the QDII but the approved quotas are much smaller. They enable asset managers to raise funds from mainly high-net-worth individuals to invest overseas and are seen to promote the development of the asset management industry in Shanghai and Shenzhen.
QDLP allows global asset managers to buy overseas assets in the secondary market. In contrast, a QDIE manager can either be foreign-invested or domestically funded and face less restrictions in their investing assets.
BNP Paribas Asset Management said on May 8 that its wholly foreign-owned enterprise (WFOE) was granted a QDLP qualification. It is planning to use the quota to offer a fund geared towards environmental, social and governance (ESG) investments.
The restart of QDII is good news for a growing number of investors seeking greater diversification. It shows China has recovered from the stock market and currency mayhem of 2015. The country's foreign exchange reserves have consistently been above $3 trillion since September 2017, Desiree Wang, China country head at JP Morgan Asset Management, told AsianInvestor.
The resumption of the QDII programme is part of the opening up of the financial sector in China. Further measures in this direction are expected to come, Liang of BAML said.