Photographer: JOHANNES EISELE/AFP/Getty Images

China May Be Set to Loosen Outbound Investment

  • SAFE is seeking State Council approval for plan, people say
  • Pilot would signal departure from recent strict yuan controls

In the latest sign that China is regaining control of outflows and confidence in market stability, talk of a plan to expand individuals’ investment options abroad is gaining new momentum two years after turmoil and capital flight led authorities to shelve the proposal.

The foreign-exchange regulator is seeking State Council approval for a pilot plan that could allow Chinese for the first time to individually invest in securities traded overseas, according to people familiar with the matter. The State Administration of Foreign Exchange plan would start in cities including Shanghai and Tianjin and would keep in place a $50,000 annual limit for residents seeking to convert yuan to foreign currencies, they said.

The plan is significant because it would signal a departure from strict controls on outbound investment by individuals and companies, including an announcement last week that further restricted the types of investments domestic companies can make abroad.

The people said a pilot program wouldn’t be possible until after the Communist Party Congress -- the timing of which has not yet been announced but is expected this fall. Factors determining whether the trial would go ahead include ongoing stable financial markets as well as continued control over the outflow of yuan, the people said, noting there’s no guarantee that the program will be launched. It has been under discussion for years.

"It doesn’t look likely to be implemented this year, given that the authorities are still wanting to contain outflows, with the State Council’s ruling last Friday on outbound investment the latest on that," said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. "I think the $50,000 limit will remain in place, as it is a means of ensuring that any outflows are limited."

Extensive Study

The central bank has reviewed a months-long study of the proposal and is prepared to move ahead with a pilot program once it receives approval from the State Council, said the people, who asked not to be identified because the matter hasn’t been made public.

The foreign-exchange regulator didn’t immediately reply to a fax seeking comment. In an email, the People’s Bank of China said it had not submitted a report to the State Council regarding the program.

The plan, known informally as QDII2, is a trial for Chinese citizens to invest in securities traded abroad. The proposal is an extension of QDII, or qualified domestic institutional investor program, that the government launched in 2006, which allows individuals to buy securities in overseas markets through asset managers.

Momentum has built for QDII2 for years, with central bank Deputy Governor Pan Gongsheng cited by the Securities Times as saying in 2015 that "conditions are ripe" to roll out the program in some places.

Not long after, China’s stock markets plunged in a $5 trillion share selloff, and investors started shifting capital overseas, betting the yuan would keep falling.

The fact that the program is again being actively discussed reflects leaders’ confidence that capital movements have returned to a more stable level. As yuan outflows abate, authorities want to refocus on economic reforms and show global markets that China is still committed to opening up, according to the people.

— With assistance by Keith Zhai, Heng Xie, Haze Fan, Ran Li, and Yinan Zhao

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