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New rule designed to help forex flow overseas
By Sun Min (China Daily)
Updated: 2004-06-14 11:32
One year after China opened the door to foreign institutions to trade
renminbi-denominated A shares and bonds, it seems to be ready to open another
gate, one that will free billions of foreign exchange funds for overseas capital
markets.
"People have been talking about the impending launch of the qualified
domestic institutional investor (QDII) scheme. We are excited about that, too,"
said Wang Hua, a fund manager of Yinhua Fund Management Co in Shenzhen, a
bustling southern city bordering Hong Kong.
An outbound capital market has always been tempting to mainland institutions
and individuals, who, with hefty savings and idle funds at hand, have been
seeking new investment channels other than in the 1,300 or so listed companies
in the mainland.
But the fact that yuan is still not fully convertible under the capital
account has limited access to overseas markets, where market practices are more
orderly and liquidity is higher, with more stocks to choose from.
Hong Kong, with its close links to the mainland and its rich financial
resources, is generally regarded as a natural first choice for mainland funds
once the official go-ahead is granted.
As a matter of fact, domestic capital has already crossed the border to enter
overseas markets through underground channels, Wang said.
Instead of blocking such capital outflow, offering legal channels and setting
new standards will actually make supervision much easier, he said.
The QDII is a twin to the qualified foreign institutional investor (QFII)
programme that was first introduced by Chinese authorities at the end of 2002
and formally kicked off last July. Both are transitional arrangements to
facilitate cross-border capital investment before the yuan is fully liberalized.
More than US$1 billion of overseas capital has flowed into A shares and bonds
over the past year through the QFII arrangement. While that infuses a fresh
concept in the mainland securities industry, it also makes local businesses more
eager to have equal access to the outside.
"QDII was a natural trend after the QFII scheme was allowed," said Chen
Weihua, investment director of Southern Fund Management Co.
The steady entry of foreign capital has added pressure for foreign exchange
regulators to keep the balance of forex inflow and outflow and maintain the
stability of yuan, Chen said. Launching the QDII programme can ease the
pressure.
According to official statistics, China's outstanding forex deposits
accumulated to US$149.8 billion by the end of May. Its capital account surplus
in 2003 rose by 263 per cent from 2002 to US$44.4 billion, largely driven by net
capital inflow.
That helps explain the enthusiasm of the forex authorities in introducing
QDII to encourage more domestic institutions to invest overseas.
"We are actively pushing the QDII programme," said Ma Delun, deputy director
of the State Administration of Foreign Exchange.
He said that the authorities had drafted a legal framework for QDII and rules
of implementation to allow social security and insurance funds to invest
overseas.
But it is not something that can be decided by a single department, he said.
It requires the consensus of several departments.
Recently there have been rumours that it is hoped the new scheme will be
launched in June or at the start of next month.
But Ma said the process is more complicated than many imagine.
"I don't think it will be so soon as some reports have predicted recently,"
he said.
In spite of the uncertainty about timing, QDII is obviously a core part of
the legislation affecting the financial sector this year.
Regulators are busy with the design of the new system so that it will
function well under efficient regulation and with standard practices.
The preparation of custodial banks, for example, has been put at the top of
the agenda by banking authorities.
Liu Mingkang, chairman of the China Banking Regulatory Commission, said last
week that after QDII takes off, it would need experienced banks to provide
custody. Foreign banks, with more expertise in developed markets, have an
advantage in this area, but mainland banks that have been trying for QFII
custody do not want to lag behind.
Securities brokerages will also struggle for opportunities to offer broking
services though, so far, only a few domestic securities houses have opened
overseas branches.
How to set up the threshold for candidates for QDII itself is also a prime
concern.
Apart from securities businesses, like investment banks and fund managers,
other domestic companies are also hopeful of obtaining a QDII licence, including
insurers, pension fund managers and trust firms.
Insiders said that to try to achieve a good start, the QDII scheme would be
tried on a step-by-step basis. So, some qualified domestic institutions would be
chosen as pilots to enter overseas markets and the authorities would still keep
a close eye on capital flow. The result of the experiment would decide how soon
the QDII scheme would be expanded to other companies.
The National Council of Social Security Fund (NCSSF), which operates nearly
140 billion yuan (US$16.9 billion) of strategic social security reserve funds,
is a pioneer in the sector.
The NCSSF obtained State Council approval to invest in overseas capital
markets in February and has been working with relevant departments to design
detailed regulations to implement the plan, including the choice of fund
managers and custodian.
Recently it acquired US$500 million of initial overseas investment quota.
A NCSSF official said that the council's march to overseas capital markets
was only one way to seek appreciation of the assets that would be used to meet
social security expenses in China in the future. And, as a special case, it is
not equal to the formal launch of the overall QDII scheme.
After all, something that may have been disturbing the securities regulators
is the impact on the mainland stock market when the overseas investment access
is opened.
It is generally predicted that funds would be diverted to overseas markets,
where the price/earnings ratio is still generally lower, which would weigh down
stock prices of domestic companies.
The mainland authorities have to be careful if they want to open the gate to
overseas investment when the domestic market still has many system flaws, said
Qi Liang, director of the research institute of China Securities Co.
Investors will compare the prices and investment value in the two markets.
Companies that have issued both A share and H share will be affected most, he
said.
And China's B shares, traded in hard currencies now, would also lose ground
to overseas stocks.
The impact on the Hong Kong market, however, is much more positive.
Since talks of an imminent launch of QDII spread in the first quarter, H
shares and red-chips have staged bullish rallies several times, though none of
them lasted for long, as lack of clarity about timing weakened the boosting
effect.
Such stocks, as well as some large-cap blue-chips, are preferred choices for
QDII, analysts said.
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