China’s central bank has moved to open up the Shanghai free trade zone further as a test bed for cross-border investing and indicated its support for overseas allocations by mainland fund houses and insurance firms.
The People’s Bank of China (PBoC) on Friday issued a document containing 40 rules to further liberalise the flow of money offshore.
It came after the government's fifth plenum that ended in Beijing last Thursday (October 29) and the announcement of China’s 13th five-year plan, which included “opening up” as a central aim.
The central bank gave the official nod to QDII2, the version of the qualified domestic institutional investor scheme for individuals, to launch in the Shanghai FTZ. This will allow eligible wealthy investors to invest in overseas real estate, financial assets and direct investments. However, no implementation date was given.
The PBoC also said it would allow onshore managers to set up subsidiaries specialising in index fund management in the Shanghai FTZ and has also given approval for domestic managers’ segregated account (SA) subsidiaries to start cross-border investment and overseas investment advisory businesses.
There are 74 SA subsidiaries in China with a total of Rmb6.9 trillion ($1.1 trillion) in AUM as of September, according to the Asset Management Association of China (Amac).
The central bank also encouraged long-term investors, particularly insurance firms, to experiment with cross-border investment through the FTZ. This could include insurers awarding foreign mandates to securities and futures firms and their subsidiaries setting up private equity funds.
QDII2 was first mooted in early 2013 in a PBoC meeting, but until now there has been no further confirmation from the central bank.
It was reported in May that the scheme was close to getting approval from the State Council, and that it would initially be launched in six cities – Shanghai, Shenzhen, Tianjin, Zhongqing, Wuhan and Wenzhou.
In the same month, Liang Hong, chief economist at China International Capital Corporation, said that under the scheme domestic individual investors would likely need to have financial assets with an average net value of at least Rmb1 million in over three months, while the quota would be 50% of an investor’s total net assets.
The timing of such liberalisation has come soon after the central bank’s landmark move to remove the deposit interest ceiling on September 30, which was the last step in the country’s interest rate reform.
“China wants to continue to open up to the world and will seek to reduce the number of industries that are off-limits to foreign investment,” noted Matthew Sutherland, senior investment director at US fund house Fidelity. This signals a renewed commitment to opening up the capital account and internationalising the renminbi, he added.