China to loosen restriction on foreign capital outflow

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 4, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet - Living up to its commitment to further open financial markets the PboC decided to loosen rules that govern forign investors. The rules with respect to foreign investors bringing money in and moving it out of China thus can now be expected to be more relaxed. People with knowledge of the matter told Bloomberg that the change would cover funds under the Qualified Foreign Institutional Investor program. China has granted about $81 billion in quotas for foreign investment in domestic stocks and bonds.

    What changes will the new rules introduce?

    The central bank has also likely decided to relax the lock-up periods for the withdrawal of QFII funds from China. This clearly indicates that the central bank’s intention to further open the capital markets has not suffered a set back post the financial market turmoil and the yuan depreciation seen in early January.

    However, Alex Wolf, an economist for emerging markets at Standard Life Investments Ltd. in Edinburgh said via Bloomberg that relaxing of lockup period will not impact outflow of capital. He is of the opinion that “if money wants to leave, it will leave regardless”. Having said that he believes these small changes will have a positive impact overall in the sense that it will give out a message that in the “face of pressure, they can still proceed with reforms”.

    Michael Wang, a strategist at London-based hedge fund Amiya Capital noted “It’s safe to say policy makers are trying to reassure foreign investors they’re not going to extend restrictions to them, so that they don’t have to take out the money or rush out to the exit now, but I’m not sure if this is enough to reassure investors."

    China had approved $80.8 billion of QFII quotas and also 469.8 billion yuan ($71.4 billion) of quotas for the Renminbi Qualified Foreign Institutional Investor program. The RQFII program enables institutions to raise yuan overseas for investing in China. With the change in rules planned by the central bank, terms governing QFII funds will fall in line with those under the RQFII program. The planned changes will now ensure that QFII funds are allowed to withdraw money from China on a daily basis as opposed to the current situation where they are subjected to lock-ups of either one week or one month. Also, institutions will be permitted to bring in portions of their QFII quotas at different times. Under the current rules institutions are given specific QFII quotas and have the permission to bring in an amount equivalent of that quota in a single transaction.

    The latest stance of the central bank to loosen rules stands in contrast to its earlier efforts to strengthen restrictions on capital flows. According to Bloomberg, outflows jumped to $1 trillion in 2015. Earlier measures to restrict outflows comprised greater examination of of transfers by individuals as well as inclusion of limits on how quickly companies could buy foreign exchange in order to pay for goods. Rules with respect to purchases of overseas insurance products using UnionPay bank cards were also tightened.

    China to restrict local residents from sending cash out

    The authorities have however tightened rules that apply to local residents looking at moving money abroad. according to Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp, policy makers are more worried about the transfer of funds by local investors to overseas destination than foreign investors taking capital out. Figures can be quoted to justify the concern of the policy makers. If just 5 percent of the 1.37 billion strong population send the maximum permissible amount of $50,000 out of the country, it would result in the depletion of the entire $3.3 trillion in reserves. Xie therefore noted “The top priority for policy makers now is to prevent Chinese individuals and corporates, who are quite pessimistic about the yuan, from sending capital out of the mainland.”
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