China Widens Yuan Investment Program in Liberalization Move

Chinese regulators expanded a program allowing institutions to raise yuan offshore for investment in the mainland, a step that moves the nation closer to a freely traded currency and may bolster confidence in the stock market.

Financial institutions registered in Hong Kong and the Hong Kong units of Chinese banks and insurers will be allowed to join units of Chinese brokerages and fund-management firms in the Renminbi Qualified Foreign Institutional Investors program, according to a statement posted on the China Securities Regulatory Commission’s website yesterday. The regulator also expanded the range of products participants can invest in beyond exchange-traded stock funds and bonds.

Standard Chartered Plc said today it would be “very interested” in participating in the program. The expansion comes as legislators meet this week at the annual National People’s Congress in Beijing, during which a new generation of Communist Party leaders headed by Xi Jinping assumes oversight of the world’s second-largest economy. The party pledged in November to make the exchange rate more market-based and promote freer movement of capital in and out of the country for investment purposes.

“This announcement will be welcomed with open arms by the many major foreign financials with any kind of significant presence in Hong Kong,” Z-Ben Advisors, a Shanghai-based fund researcher, said in a report today. “We anticipate at least 20 will be lining up to apply for an RQFII license in the coming months.”

Major Operations

The program will now be open to foreign financial institutions that have incorporated a unit in Hong Kong and have “major business operations” there, Xu Hao, who oversees the CSRC’s fund-management supervision division, said by phone from Beijing today.

London-based Standard Chartered garnered about 18 percent of its 2012 revenue from Hong Kong, data compiled by Bloomberg show. The lender is the third-largest underwriter of yuan-denominated, or Dim Sum, bonds, the data show.

“If the CSRC can increase the RQFII quota and change the asset mix rule to allow more investment into the equity market, investors in Hong Kong and overseas will greatly welcome this,” Benjamin Hung, Standard Chartered’s chief executive officer for Hong Kong, told reporters today. The bank “will also be very interested in participating,” he said.

Index Futures

China approved the RQFII program in December 2011. A total of 27 offshore units had been awarded 70 billion yuan ($11.2 billion) of quota to invest, according to the CSRC statement. Of that amount, 27 billion yuan had been invested in bonds, and 43 billion yuan in exchange-traded funds, the CSRC said.

Participants will now be able to invest in stock-index futures, where before they were limited to equities and bonds, the statement said. RQFII funds will also be able to take part in initial public offerings, convertible bond sales and share placements, according to the CSRC.

“The amendment relaxes the RQFII asset allocation restriction, which allows institutions to decide on types of product on their own depending on market conditions,” the regulator said. “The CSRC will continue to expand the scale of the trial to attract more long-term foreign funds, to ensure the reform and opening of capital markets and its steady development.”

Stocks, Bonds

The expansion of the RQFII scheme will permit the introduction of a broader range of yuan-based investment products, John Tsang, Hong Kong’s financial secretary, and Alexa Lam, deputy chief executive officer of the city’s Securities and Futures Commission, said in separate statements today. The amended rules now allow all Hong Kong-licensed asset-management companies to participate, Tsang said.

The first batch of yuan QFII funds, which raised 20 billion yuan, were required to invest at least 80 percent of assets in bonds, with the rest going into equities or kept as cash.

In April, the government announced further RQFII quota of 50 billion yuan for exchange-traded funds to invest in the domestic A-share market. Available RQFII quotas were boosted to 270 billion yuan in November and Guo Shuqing, chairman of the China Securities Regulatory Commission, said on Jan. 14 that the ceiling can be raised by 10 times.

“The RQFII expansion is a long-term positive for the yuan,” Tommy Ong, a Hong Kong-based senior vice president of treasury and markets at DBS Bank (Hong Kong) Ltd., said by phone today. “Not only will that boost investor demand for the currency, it’ll also provide a tool for the Chinese government to test the impact of foreign capital on capital markets.”

Yuan Appreciation

After keeping the exchange rate stable for a decade, China allowed its currency to strengthen 21 percent from July 2005 to July 2008, including an initial, single-day gain of 2 percent. Appreciation was then halted for almost two years to help exporters weather a global recession and the currency has advanced almost 10 percent against the dollar since controls were loosened on June 19, 2010.

Yi Gang, a deputy governor at the People’s Bank of China, said cross-border yuan flows are “totally controllable” when asked if they would be affected by the RQFII expansion. Yi spoke to reporters at meetings of the Chinese Political Consultative Conference in Beijing today.

The central bank’s next step in overhauling the foreign-exchange system will focus on convertibility, Governor Zhou Xiaochuan said Nov. 17 in Beijing. Premier Wen Jiabao, who steps down at the NPC, pledged this week to expand cross-border use of the yuan and encourage foreign investment as the government allows a 50 percent jump in the budget deficit to spur economic growth.

Allowing more participants into the RQFII program increases the prospect of more international inflows that will bolster the nation’s stock market. The Shanghai Composite Index has fallen

4.7 percent from a nine-month high reached on Feb. 6 as the government moved to enforce curbs on property ownership.

“The new policy is in the right direction,” Du Liang, an analyst from Shanxi Securities Co. in Beijing, said by phone today. “They are trying to increase demand for local shares.”