China Encourages More Domestic Investment Abroad
China is moving to encourage domestic institutional investors to pour more money into foreign capital markets as the yuan appreciates strongly against the dollar amid accelerating post-pandemic inflows of funds.
The foreign exchange regulator will start issuing about $10 billion new Qualified Domestic Institutional Investor (QDII) quotas in several batches, an official from the State Administration of Foreign Exchange (SAFE) said Wednesday at an industry seminar. The annual total would represent a 10% expansion of the program. The agency issued $3.36 billion of new quotas last month, the first in a year and a half.
The yuan is trading at its highest levels in more than two years, fueling expectations that Beijing would move to rein in the surge. The currency climbed as much as 0.55% Wednesday to its strongest since July 2018. The yuan gained almost 5% over the past three months.
The appreciation reflects China’s robust economic recovery from the coronavirus pandemic. China’s gross domestic product expanded 4.9% year-on-year in the third quarter. Chinese central bank Governor Yi Gang said Sunday that China’s economy is likely to grow about 2% this year, making it one of the only major economies to record full-year expansion for 2020.
The QDII program was launched in 2006 to allow qualified domestic institutions to invest in overseas capital markets. These include commercial banks, insurance companies, securities firms and fund managers. They act as conduits for channeling funds into offshore investments, which could increase demand for the U.S. dollar.
Beijing has stepped up efforts to open its capital markets to foreigners but has largely kept tight control over outbound flows of funds. Before 2006, retail investors were not legally permitted to participate in offshore capital markets. Even with the introduction of the QDII program, the State Council, the country’s cabinet, originally capped the total quota at $90 billion, which was all used by 2016.
On Sept. 23, SAFE granted the $3.36 billion of QDII quotas to 18 institutions, the first time the quota was expanded since April 2019. The new grants increased the total quota to $107.34 billion.
Under the QDII policy framework, a total quota is set by the State Council. The China Banking and Insurance Regulatory Commission (CBIRC) and the China Securities Regulatory Commission (CSRC) are responsible for examining QDII qualifications, and SAFE grants the quotas and supervises inbound and outbound fund remittances.
At an annual financial forum Wednesday, a SAFE official told reporters that the regulator plans to increase the QDII quota in batches by about $10 billion in the near future.
Meanwhile, China will also expand the Qualified Domestic Limited Partner (QDLP) and the Qualified Domestic Investment Enterprise (QDIE) programs currently being tested in Beijing, Shanghai and Shenzhen, the official said.
The QDLP refers to fund managers set up in China that raise funds domestically in private equity circles and invest in the overseas secondary market. The QDIE is a similar program allowing domestic investors to invest in foreign private companies, hedge funds and real estate.
Contact reporter Denise Jia (firstname.lastname@example.org) and editor Bob Simison (email@example.com).
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