Watchlist for China Financial Reforms in Market-Opening Campaign

This month in China, the Premier pledged to press on with “wrist slashing” reforms, while the central bank governor has promised to further open financial borders in the quest to gain reserve status for the nation’s currency.

As the final year in China’s 12th Five-Year Plan, deadline pressure looms for many proposals outlined back in 2011. Also upcoming later in 2015 is the International Monetary Fund’s once-in-five-year review of whether to include the yuan in the Special Drawing Rights basket.

Here are the banking changes to watch out for in the alphabet-soup of China’s regulatory regime as the government pushes for a more open, market-driven economy:

1. Foreign Cash

Chinese individuals are allowed to buy the equivalent of $50,000 in foreign currency for travel, shopping and study each year. More than that, and it’s off to the foreign exchange regulator for approval. That could change this year.

“If it happens, it shows authorities are confident that capital outflow risks are under control,” said Li Liuyang, the Shanghai-based chief financial market analyst at Bank of Tokyo-Mitsubishi UFJ (China) Ltd.

2. Bigger QFII Quota, Easier Rules

China’s Qualified Foreign Institutional Investor program, a more than 10-year-old scheme licensing “qualified” overseas investors to buy into China’s mainland securities under a given quota, imposes three-month lock-up periods and repatriation restrictions, preventing investors from making frequent transactions. The quota was $70 billion as of February, a mere 1.1 percent of China’s $6.3 trillion stock market.

It’s “not convenient or flexible,” according to People’s Bank of China Governor Zhou Xiaochuan.

“Quotas will be raised,” said Chen Xingdong, the Beijing-based chief China economist at BNP Paribas SA. “But more importantly, the whole thing will be easier.”

3. QDII and QDII2

Chinese citizens are currently allowed to invest abroad through funds that are licensed under the Qualified Domestic Institutional Investor program. For a nation with a household savings pool of about $8 trillion, the $88 billion QDII quota at the end of February appears on the small side.

When asked whether China will relax limits on outbound investment by individuals, Yi Gang, the head of the State Administration of Foreign Exchange, said this month that China will consider a “QDII2,” or direct overseas investments by qualified individuals, “in the near future.”


China is widening the channels for onshore and offshore yuan markets via two programs, Renminbi QFII and Renminbi QDII. SAFE has been accelerating quotas of RQFII to accommodate overseas yuan holders’ demand for the nation’s equities and bonds. Further expansion is likely to boost the connection between the onshore and offshore yuan markets.

5. Bigger Hong Kong-Shanghai Stock Link?

The link started last year has many restrictions, including investment quotas and the assets on offer. Investment targets in the program may be widened to exchange-traded funds and small-cap stocks, while increased quotas is a more remote possibility.

6. Hong Kong-Shenzhen Stock Link

Chinese Premier Li Keqiang said in his government work report this month that the scheme will be started at an appropriate time. Xiao Gang, the chairman of China Securities Regulatory Commission, said it will start within 2015.

7. Easier Bond and Stock Sales

According to the PBOC’s Zhou, rules will be relaxed for Chinese companies to sell bonds and stocks in overseas markets, and overseas companies will be allowed to sell stocks or bonds in domestic markets. Fundraising both ways can be in yuan or dollars. No timing has been provided by the PBOC.

“The direction is clear -- the opening will happen eventually, although the timetable is hard to predict,” Zhuang Juzhong, the deputy chief economist of Asian Development Bank, said at a briefing in Beijing Tuesday.

Another development could be further opening of the interbank bond market to more overseas institutions.

8. Deposit Insurance System and Free Deposit Rates

China’s deposit insurance system will be launched this year, a step needed to allow true bank competition, the government has said. Meantime, limits on what banks can pay depositors are likely to be scrapped.

9. New Private Banks

China may issue dozens more licenses to privately-owned lenders in 2015, inserting new competition for the state-dominated banking sector. According to Nicholas Lardy, who’s studied China for more than three decades and is a senior fellow at the Peterson Institute for International Economics, China may have one new private bank for each of its 32 provinces and territories.

“They will be very small to begin with, but the competition on the margin makes a difference,” said Lardy.

10. Free-Trade Zone Trials

China on Tuesday approved another three free-trade zones, in Tianjin, Guangdong and Fujian, in addition to the existing zone in Shanghai. The government may become bolder in testing new openings in these designated areas, where there are fewer restrictions on moving money in and out of the country.

“The PBOC will probably use free trade zones to conduct trials on further opening in the capital account,” said Yan Hong, professor of finance at Shanghai Jiaotong University.

11. Freer Yuan?

China currently limits yuan movements against the dollar in onshore markets to 2 percent either way from a central point it fixes each day. That may be widened to make the yuan exchange rate more flexible and win over IMF approval for its SDR push. A more radical, and more unlikely option, would be to scrap the range altogether.

If China’s capital account becomes completely open and the yuan is freely usable, then the existing qualified investor schemes will become unnecessary.

— With assistance by Xin Zhou

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