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Shanghai - China will give a $38bn investment quota to the US, the largest after Hong Kong, as the Asian nation increases efforts to broaden use of the yuan overseas and lure capital back to the mainland.
The Chinese currency quota will be allocated under the Renminbi Qualified Foreign Institutional Investor scheme, the People’s Bank of China Deputy Governor Yi Gang said at a Tuesday briefing in Beijing on the sidelines of the two-day US-China Strategic and Economic Dialogue.
This is the first time China has given the quota to the US, which allows overseas institutions to use the yuan raised offshore to invest in onshore capital markets.
Chinese authorities have been intensifying efforts to liberalise its capital markets before a decision by MSCI this month on whether to allow the nation’s yuan-denominated shares into its global indices.
Measures include relaxing controls over foreign investors’ access to its domestic markets and scrapping quota controls over the interbank bond market. With an estimated $1trn in capital flowing out of the nation in the past year, the government is seeking to stabilise the yuan before it joins the International Monetary Fund’s reserve basket of currencies this fall.
Market opening
“Given the net outflow in China’s capital account, China naturally welcomes more inflows, which can be seen in a series of market-opening measures so far this year,” said Li Liuyang, Shanghai-based market analyst at Bank of Tokyo-Mitsubishi.
“Chinese policy makers would want to see more offshore yuan flow back - that’s the policy direction. Looking forward, if the the quota in the US is quickly used, then China is likely extend yuan trading hours to cover the US hours.”
The State Administration of Foreign Exchange granted a total of 502 billion yuan of RQFII quota as of the end of May, with Hong Kong getting 270 billion yuan of the amount. More than a dozen nations have been granted quotas.
“We think that in the whole process of RMB internationalization, market demand plays a dominant role,” the PBOC’s Yi said. “If we can choose RMB and use RMB for investment it will be more effective and at the same time reduce financing costs for Chinese enterprises and relevant enterprises.”
Getting US investors on board may not be an easy task. China’s currency, bonds and equities all fell for a second straight month in May - the first time that’s happened since at least 2006, according to data compiled by Bloomberg. The benchmark Shanghai Composite Index has tumbled 42% over the past year.
