Year of the Pig reflections: China’s approach to investment rules

AsianInvestor looks back on our Year of the Pig predictions. In our latest reflection, we consider our view from last year on whether China would ease inbound investing.
Year of the Pig reflections: China’s approach to investment rules

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

Our anti-penultimate Year of the Pig reflection asked whether China's regulators would permit more liberalisation of its investment industry rules, to encourage more foreign investments and a greater array of foreign investment companies to set up shop. 

Will China ease its inbound investment rules?

Answer: Yes (less sure about outbound rules)

This was one of the easier predictions to get right. China's government has made its liberalisation intentions clear when it comes to inbound investment flows.

The country's slowing economy and narrowing current account surplus means that it is increasingly eager to encourage more foreign companies and investors to put their money into its economy. The key challenge has been to do so while retaining the control that Beijing so craves over its own currency and economy. 

This tricky balance has led China's government and regulators to be relatively cautious over how they have lifted the rules limiting investment flows. However, it began 2019 on a positive note, 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 programmes into one.

Then on January 31 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.

It followed this on July 20, 2019 by accelerating a plan to let foreign asset managers take majority stakes in local joint-ventures to this year, instead of 2021. As a result, foreign asset managers will be able to apply to become local fund management companies (FMCs) from April 1.

This particular licence effectively means that international asset managers can offer mutual fund products to local investors once approved (something that's likely to take place by the second half of the year for the first few managers in the process). In addition, the size and growing potential of China's onshore capital markets and private asset potential have led asset owners such as Allianz to invest more onshore, while Dutch pension fund manager APG has set up an onshore fixed income team to invest in renminbi bonds. 

The reason for the liberalisation is simple: China's asset management industry is growing fast, but its local players lack the sophistication to both create new products and push boundaries effectively. To ensure there is sufficient fund managment to meet investor needs, push boundaries in areas such as quantitative investing, and support local fund-raising efforts. In effect, Beijing has realised that it needs the decades-long expertise of international fund houses

That said, many hurdles for foreign asset managers remain. There are sizeable foreign exchange restrictions for a start. Plus the capital controls that exist mean that fund houses could find it tricky to get money out of China from their local operations. In addition, a recruiter told AsianInvestor that there are still limitations to the new FMCs. For example, their foreign owners will have to hire local executives in key roles, including chief technology officer, while any local analysis of markets and assets will not be able to be distributed out of China. 

Our doubt about the likelihood of there being any outbound investment rule liberalisation was also well founded. Beijing did not make any major efforts to loosen its outbound capital rules for local investors last year, no doubt worried that individuals or companies may take advantage of them to shift money offshore at a time when the renminbi has been weakening. It appears unlikely to directly do this year either. 

Previous Year of the Pig reflection articles: 

Will the US economy suffer a major downturn? 

Will ETF Connect between China and Hong Kong finally open?

How much will Asian asset owners add to alternatives?

Have asset owners set realistic investment targets for 2019?

Will asset owners treat ESG as more than a box-ticking exercise?

Will Brexit have a major impact on global or Asian markets?

Will fixed income outperform equities?

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