Breakingviews – Beijing’s new moves dance around capital controls
HONG KONG (Reuters Breakingviews) – Beijing keeps skirting around its formidable capital controls. Quotas on a pair of high-profile inbound investment schemes are being scrapped in a somewhat symbolic move. China wants more foreign funds, but not enough to put outbound flows at risk.
The qualified foreign institutional investor scheme, or QFII, and its yuan-denominated sibling, RQFII, are well-known to overseas financiers. Introduced in 2002, QFII was an important part of the early efforts to open Chinese equity markets to outside money. The programmes were quickly eclipsed, however, by more straightforward stock-buying links from Hong Kong to mainland exchanges starting in 2014. Although officials have increased the permissible amounts for the QFII programme – doubling it to $300 billion earlier this year – interest has not kept pace. Only about a third of the limit had been reached at the end of August.
That might mean the quota removal announced on Tuesday proves a mostly incremental step. Beijing has made no secret of its desire to attract foreign capital. Earlier this year, a top securities regulator predicted net stock market inflows could total 600 billion yuan ($84 billion) in 2019, twice last year’s level. The motivation appears to be partly practical, as China seeks to goose its cooling economy, and partly image-related, to show the world amid a bruising trade war with the United States that it can reform.
As often, the opening is essentially one-way. Programmes allowing funds to move in the other direction, such as the qualified domestic institutional investor scheme, or QDII, have a tortuous history. These outbound initiatives are subject to long halts, as well as so-called “window guidance”, or informal instructions from regulators. Last year, for instance, officials urged licence holders of one outbound programme to be “low profile” in their marketing.
The reason is clear: since 2015, Beijing has faced a very real threat of capital flight, which might in turn significantly weaken its currency. What’s more, the country is grappling with a large debt pile, at 250% of GDP, more monetary easing and even the odd bank bailout, all of which could seriously exacerbate outflows. China’s entryway for investors may be a bit wider, but the egress will only be slightly ajar for some time.
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