Market Views: When will China lift outbound capital limits?

Now that the quota limits of QFIIs are gone, should Chinese domestic investors expect their overseas investment restrictions to go away as well? Five specialists give their views.
Market Views: When will China lift outbound capital limits?

China has lifted the investment restrictions on its Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programmes.

Although largely a symbolic move, given the infrastructure already in place for cross-border trading such as the Shanghai-Hong Kong Stock Connect, it highlights Beijing's growing efforts to draw foreign capital to its onshore markets.

However, it's not two-way. Domestic asset owners are still bound by overseas investment quotas and some aren’t allowed to allocate outside of China at all, even though pressure to diversify globally is growing among Chinese institutional investors.

Despite reports early last year suggesting the restarting of the Qualified Domestic Limited Partner (QDLP) programme to enable wealthy Chinese investors to invest in offshore alternatives, there is some evidence this year to suggest it has stalled.  

And according to official data from the State Administration of Foreign Exchange as of August 30, the last approval given under the Qualified Domestic Institutional Investor (QDII) scheme to invest overseas was in April.

Given that China is gradually opening up its economy to foreign investors, how likely is it that domestic asset owners will soon get the green light in the other direction so that they can freely invest – or, at least, invest more – abroad?

AsianInvestor asked five industry specialists for their views.

The following extracts have been edited for brevity and clarity.

Brock Silvers, managing director
Kaiyuan Capital

I’m sceptical that Beijing will soon end or even significantly ease QDII restrictions. China just moved to end QFII restrictions but that was an attempt to attract added inflows, while QDII manages outflows. 

Right now China’s need to inject added capital into a slowing economy drove the QFII decision, but the trade war and weakening renminbi have only increased Beijing's concern regarding outflows. The changes to QFII restrictions will have little impact, but should China end or even significantly reduce QDII restrictions, the result would be almost immediate: a deep undercutting of local capital markets and added pressure on the renminbi.

Were China to allow unrestricted investment flows and freely float the renminbi, the ensuing boom would be truly historic, but these types of reforms aren’t politically feasible at present, and are even less so in the current trade war environment. 

Nathan Chow, senior economist

It's very unlikely due to capital outflow fears. This is particularly true as the  renminbi will continue under pressure amid an escalating trade war and slowing domestic economy. The latest QFII/RQFII relaxation can be seen as a move to further liberalise the capital account. Luring more overseas liquidity makes sense as the country is heading for fiscal and current account deficits. But not the other way around.

That means any liberalisation, at least in the near term, will be asymmetrical. Don’t forget Bond Connect is still a one-way street.

Chi Lo, senior economist for Greater China
BNP Paribas Asset Management

From a macro perspective, I don’t think it is likely that the QDII scheme will be scrapped anytime soon, simply because of its cautious approach to opening the capital account. Beijing has been pursuing an asymmetrical capital account opening process, where it liberalises capital inflows much wider than capital outflows. And this asymmetrical capital account liberalisation process applies both to portfolio and foreign direct investment flows.

QDII is a control mechanism for regulating portfolio capital outflows and is unlikely to be scrapped in the medium-term.

David Qu, economist

The limit on QDII is unlikely to be removed in the near term. Even any relaxation on the limit will require careful consideration and assessment before taking place.

This may reflect the authorities' strategy – with the first priority being to open domestic markets to overseas investors, so as to improve the efficiency of markets and attract capital inflows.

Desiree Wang, head of China
JP Morgan Asset Management

China is an increasingly important and integral part of the world economy … So any efforts from China to support cross-border flows, inbound and outbound, [are welcome]. It not only helps global investors increase their allocation to China, it also helps Chinese investors further diversify their portfolios.

We are very pleased to see more cross-border flows between China and the world, and a balanced two-way traffic would be important for both.

The total QDII quota is $104 billion, and with the Mainland-Hong Kong Mutual Recognition of Funds and QDLP, have collectively provided Chinese investors with opportunities to invest offshore.

We observe an increasing demand for global diversification.

*Joe Marsh contributed to the story.

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