China has approved record amounts of investment to flow out of the country through an official scheme as authorities liberalise the local financial system against a backdrop of a rallying renminbi.
A cumulative $147bn of approvals have been added to the nation’s qualified domestic institutional investor scheme, which allows investors to access assets outside mainland China through banks and other institutions.
In early June, Beijing approved $10bn in new QDII allocation, the highest single amount in the history of the scheme, which was launched in 2006 and is used mainly by China’s retail investors.
The move to allow more capital to leave the country came as policymakers have increasingly voiced concerns over high asset prices, as well as a rally in the currency. Due to strict controls on its capital account, China’s vast household savings are primarily funnelled into domestic markets.
The renminbi has strengthened almost 10 per cent against the dollar in the past year and hit a three-year high in May. To help cool it, China’s central bank this month demanded lenders increase holdings of foreign currencies for the first time since the 2008 financial crisis.
Mitul Kotecha, chief emerging markets Asia and Europe strategist at TD Securities, said the renminbi’s strength against the dollar and on a trade-weighted basis had caused a “high degree of consternation” among policymakers in Beijing, and that QDII outflows were one measure to counter its rise. A stronger renminbi can make Chinese exports less attractive on the international market.
The renminbi’s jump came in response to China’s swift economic recovery from Covid-19 and inflows last year to its rapidly evolving bond and equity markets, where foreign investors still make up a small portion of ownership. Policymakers have grown concerned over rising property prices as well as recent volatility in international commodities markets.
“If we look at it longer-term, this is part of China’s opening of the capital account, in support of renminbi liberalisation,” said Shuang Ding, chief economist for greater China and north Asia at Standard Chartered, of the record QDII approval. In the short term, he added, it was related to “the strength of the currency”.
The expansion of the QDII quota will complement other Hong Kong-linked programmes that allow investment to flow out of China. However, any outflows via these schemes must eventually be converted back to renminbi.
The Stock Connect programme, which was launched in 2014 and allows investors in Hong Kong to buy mainland Chinese shares and vice versa, has drawn $60bn of flows into Hong Kong this year and $32bn into mainland China. Beijing last month also unveiled rules for a wealth link with Hong Kong, which will open up another route for savers in mainland China to tap offshore investment products.
The record approval of outflows has also come alongside a wave of interest from global banks and asset managers in mainland China. Last month, Goldman Sachs announced it would partner with ICBC, one of China’s biggest banks, to launch a wealth management business that is expected to sell “cross border” products to its customers.
Not all of the approved QDII quota has been used. At the end of 2020, $83bn of foreign securities were held through the scheme.