Year of the Pig outlook: Will China ease investment rules?

AsianInvestor presents a set of financial and economic predictions for the Year of the Pig. Today we assess whether China will this year loosen its grip on capital controls.
Year of the Pig outlook: Will China ease investment rules?

At the beginning of every Chinese New Year, AsianInvestor makes 10 predictions about economic, political and financial developments that are likely to have an impact on the way institutional investors assign their money.

Today we turn our attention to the world’s second-largest economy and the extent to which Beijing will be encouraged to further ease its rules on inbound investments.

Will China ease its inbound investment rules?

Answer: Yes (less sure about outbound rules)

China's intensifying trade war with the US and pressure on the renminbi is likely to cause Beijing to further relax its rules over inbound investments, market experts have told AsianInvestor.

Indeed, initial signs are already pointing to that with the floated merger of two of its leading inbound investment schemes to attract more foreign capital and further open up its capital market.

In a consultation paper released on January 31, the China Securities Regulatory Commission proposed merging the Qualified Foreign Institutional Investor (QFII) and the Renminbi Qualified Foreign Institutional Investor (RQFII) schemes to help raise their waning appeal with foreign investors.

The securities regulator said it is also keen to relax relevant restrictions and expand the investment scope of the merged scheme and introduce a simplified vetting process that would hopefully further reduce the turnaround time for approving the quotas.

Another recent example of China’s liberalising efforts took place on January 29, when the People’s Bank of China authorised the Beijing-based and wholly-owned subsidiary of Standard & Poor’s to rate onshore bonds in China. Previously only the onshore joint ventures of international credit rating agencies were permitted to do so, but offshore investors have generally regarded these ratings as less reliable. 

Market expert opinion is mixed about how China will continue to open up its capital markets.

It may do so by relaxing its existing rules or through new endeavours like the London-Shanghai Connect, one director at an international capital markets group  told AsianInvestor

It might keep outbound capital controls pretty tight but do what it can to ease inbound controls to attract more foreign capital, one emerging markets economist at a funds firm said.

Or it might yet have to respond to a different scenario as more capital flows in, the chief investment officer of one asset manager said, citing how Bond Connect and the way it has made China's domestic bonds market more accessible than hitherto.

That, together with the looming addition of China bonds to the benchmark Bloomberg Barclays Global Aggregate Index, had the potential to put upward pressure on the currency, he said.

As a result, it could prompt a relaxation of the outbound rules too, including RQDII and QDII investment parameters, he added.

Chinese renminbi-denominated government and policy bank securities are set to the benchmark global bond index from April 2019 and phased in over a 20-month period.

"When fully accounted for in the index, local currency Chinese bonds will be the fourth-largest currency component following the US dollar, euro and Japanese yen," Bloomberg said on January 30. Using data as of January 24, 2019 the index would include 363 Chinese securities and represent 6.03% of a $54.07 trillion index upon completion of the phase-in."

So, on paper, that could help to drive foreign capital inflows into China by making it easier for more foreign investors to invest in Chinese bonds, both the CIO and the emerging market economist said.

We believe Beijing will most likely relax its rules to help attract more inbound investments. We are less clear about the degree to which investors will subsequently ramp up their investments into a slowing economy.

Previous Year of the Pig predictions:

Will bonds beat stocks?

Can Brexit shock global markets?

Will asset owners take ESG seriously?

Have asset owners set realistic investment returns targets for the year?

Will the ETF Connect finally open? 

How much will Asian asset owners increase alternative asset allocations?

Will the US economy suffer a major downturn?


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