Under a deal with China's banking regulator, the U.S. becomes the fifth overseas market in which Chinese banks and trusts can invest
The China Banking Regulatory Commission (CBRC) says it has signed a memorandum of understanding with the Securities & Exchange Commission in the US. The agreement is a de facto approval for Chinese banks and trusts to begin overseas investments in the US. It is similar to a previous understanding signed with the Hong Kong Securities & Futures Commission which allows Chinese banks to invest in equities, fixed income and mutual funds recognised by the US regulator.
Christopher Cox, chairman of the SEC, said at the signing ceremony with Liu Minkang, chairman of the CBRC, that the US regulator would work closely with the CBRC for information exchange, monitoring and building a cooperative framework for QDII developments.
The deal has come after a recent state visit by US Secretary of the Treasury, Henry Paulson, to China. Paulson, responding to Chinese premier Wen Jiabao's vocal concerns on the US economy, reassured China about the US's long-term stability and said the subprime crisis would be limited.
Paulson's previous attendance of a Strategic Economic Dialogue conference with Chinese officials has resulted in a three-fold increase in total qualified foreign institutional investor (QFII) quotas from $10 billion to $30 billion. The QFII programme, unlike QDII, allows overseas investors to invest in Chinese domestic securities.
Unlike its more progressive counterparts in the China Securities Regulatory Commission, which provides oversight to fund management and brokerage houses, the CBRC has only recognised four other foreign markets. The 23 domestic and foreign banks with QDII licenses are allowed to participate in 'mature' markets, such as Hong Kong, Singapore, the UK and Japan.
At the height of the overseas investment frenzy in October last year, the QDII scheme was believed to have attracted close to $25 billion of liquidity from both Chinese and foreign investors into the Hong Kong market, driving one of the most aggressive run-ups in the Hang Seng Index to over 30,000 points, which led to a period of uncertainty in inflation, and Hong Kong citizens calling for the unpegging of the Hong Kong dollar from the US dollar.
The scheme has been on a respirator since, particularly following the spread of the subprime crisis to global markets. Minsheng Bank has been one of the key victims affected as it announced the collapse of its QDII product.
The outlook for the QDII scheme remains uncertain for the rest of 2008, given that Paulson's other agenda includes the revaluation of the renminbi. His previous lobbying might have partly contributed to an upward surge in the Chinese currency against the dollar: just in the past quarter, it has risen by 4%. Chinese citizens view dollar-linked investments with a wary eye and the expectation of depreciation. Observers widely believe the yuan will rise further to see a US-RMB cross-rate below seven this year.
An internal source says the Chinese regulators are closely monitoring developments in the US and UK on the subprime crisis and the emergence of super-regulators for financial market oversight. Chinese leaders are drawing parallels within in the QDII system, CSRC, CBRC, CIRC (an insurance regulator), the State Administration for Foreign Exchange (SAFE), not to mention the National Development & Reform Commission and even the State Council from day-to-day operations to policy designs.