China has further loosened controls on overseas investments by Chinese domestic investors, a move that’s likely to trigger a sharp rise in the outflow of funds into markets in Asia and elsewhere.
The Government has eased the regulations on an existing scheme that has limited investors to a sort of financial straitjacket of low yielding fixed interest investments, with investments in more speculative areas such as commodities and low-rated shares banned by the Government.
It is being interpreted as a response to China’s growing speculative stock market boom and a way of recycling its trillion dollar plus pool of foreign exchange reserves.
They were further boosted last month by a higher than expected trade surplus of $US16.9 billion.
Under the new rules, Chinese banking clients can gain exposure to foreign equity funds authorised by overseas regulators such as Hong Kong’s Securities and Futures Commission, which recently signed a memorandum of understanding with China’s banking regulator.
Hong Kong analysts say that Chinese banks are expected to offer these funds in the form of wealth management products, which are allowed to invest up to half of their net asset value in overseas equities.
The products will need a minimum investment of Rmb300,000 ($39,000) and will only be allowed to invest a maximum of 5 per cent of their net asset value in individual stocks.
They will have to be clients of Chinese banks to do so but analysts in Hong Kong, Europe and the US say that a tide of money will gradually emerge from China into markets like Hong Kong, and then further afield.
The decision, revealed on Friday night, is also seen as a reaction to the asset bubble in domestic Chinese stock markets: the key Chinese index rose over 4,000 points last week for the first time as turnover on the country’s two internal exchanges, Shanghai and Shenzen, exceeded turnover throughout Asia on Wednesday.
Commercial banks will be able to invest as much as 50 per cent of funds in the qualified domestic institutional investors program, or QDII, in overseas stock markets, the China Banking Regulatory Commission said on its Web site.
The existing QDII system has authorised up to $US18.5 billion overseas, but Hong Kong reports say not all of this has been taken up. That’s partly because banks have been allowed only to offer low yielding fixed interest products which have paled as alternatives to the overheated local stockmarket and its one per cent a day rate of growth in recent weeks.
As well QDII investors are not allowed to invest in commodities, derivatives products, hedge funds or securities with a rating of less than BBB and that has further limited their appeal.
The policy change is also seen as a way of capping or cutting the build up in China’s huge foreign exchange reserves.
They are running at $US1.202 trillion and on Friday the Standard Chartered Bank forecast foreign exchange reserves would hit $US1.6 trillion by the end of the year. That forecast was made before news of the major policy switch was revealed.
Hundreds of billions of dollars have flooded into China’s financial system, mostly through trade surpluses and foreign investment in sectors such as manufacturing and property.
This has led to an investment boom in every imaginable industry and speculative bubbles in property and in the stockmarket, especially since early March, after the February 28 share-out.
Around 8.7 million new stock trading accounts opened in China in the March quarter, according to the central bank’s quarterly reported issued on Friday with another 4.5 million in April alone.
This is going to spark a boom for international fund managers with the new rules, in effect, allowing foreign groups to tap China’s $US2,000 billion of bank deposits and other domestic savings without having to form mandatory fund joint ventures with local partners.
The existing Qualified Domestic Institutional Investor scheme will pump billions of dollars into foreign markets, but in a highly controlled way, unlike the new system which will have more freedom and allow for greater choice.
The central bank said the new investment rules will be relaxed but banks will still be barred from investing in hedge funds, commodity derivatives and securities rated below investment grade. And individuals will still be barred from investing directly overseas.
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Friday also provided a very timely reminder about the urgent need for the Chinese government to do something to limit the build up in reserves and the investment bubbles popping up in the market and other industries.
The country’s trade surplus for April rebounded sharply from March’s low figure to total $US16.9 billion.
Exports rose 26.8 per cent and imports jumped 21.3 per cent. China’s General Administration of Customs said the trade surplus for the first four months of 2007 was $US63.3 billion, 88 per cent above the first four months of 2006.
The news of the surplus and the significant loosening comes two weeks before US Treasury Secretary Henry Paulson and China’s Vice Premier Wu Yi meet for trade talks in Washington.
China last week said it would buy $US4 billion of American technology products and allowed the Yuan to have its biggest rise since the fixed rate system ended in July 2005. It finished last week with a rise of 0.22 per cent and currency traders said it has now risen 7.8 per cent since the managed float was introduced.
April’s trade surplus jumped from $US6.9 billion in the previous month and $US10.4 billion in April 2006.
