CAPITAL ACCOUNT LIBERALIZATION
1. As the country’s capital account becomes increasingly open in de facto terms, China still has an extensive capital control regime. In most cases, constraints on capital inflows and outflows have been loosened but not eliminated.
2. A Summary of Recent Schemes to Liberalize Cross-Border Capital Flows.
Channels for Inflows
Qualified Foreign Institutional Investor (QFII) Scheme: Launched in
2002. Allows qualified foreign institutions to convert foreign currency into
RMB and invest in Chinese equities (both A shares and B shares) and a range
of other RMB-denominated financial instruments. As of October 2015, a total
quota of $78.9 billion had been granted to 277 foreign institutions,
including 8 central banks and 10 sovereign wealth funds.
Renminbi Qualified Foreign Institutional Investor (RQFII) Scheme:
Launched in 2011. Allows qualified institutions to use offshore RMB funds to
invest in Chinese equities and other RMB-denominated financial instruments.
As of July 2015, a total quota of $68.4 billion had been granted to 135
financial institutions.
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Channels for Outflows
Qualified Domestic Institutional Investor (QDII) Scheme: Launched in
2006. Allows Chinese domestic financial institutions—commercial banks,
securities companies, fund management companies, and insurance companies—to
invest in offshore financial products such as securities and bonds. As of
November 2015, a total quota of $90 billion had been granted to 132 financial
institutions.
Qualified Domestic Individual Investor (QDII2) Scheme: Proposed in
2013; not yet launched. Will permit individual retail investors with at least
RMB 1 million ($160,000) in assets to invest in certain offshore financial
products.
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Channels for Two-Way Flows
Free Trade Zones (FTZs): Shanghai FTZ launched in September 2013.
Three new FTZs in Guangdong, Tianjin, and Fujian launched in April 2015. The
FTZs use a “negative list” approach to regulate foreign investment—there are
few restrictions on foreign investment in industries not on the list.
Crossborder capital transactions and establishment of financial institutions
within the zones have been liberalized.
Shanghai-Hong Kong Stock Connect: Launched in 2014. Allows mainland
Chinese investors to purchase shares of select Hong Kong and Chinese
companies listed in Hong Kong, and lets foreigners buy Chinese A shares
listed in Shanghai. HK-to-Shanghai annual quota: RMB 300 billion ($47
billion); daily quota RMB 13 billion ($2 billion). Shanghai-to-HK annual
quota: RMB 250 billion ($39 billion); daily quota: RMB 10.5 billion ($1.6
billion).
Mutual Fund Connect: Launched in July 2015. Allows eligible mainland
and Hong Kong funds to be distributed in each other’s markets through a
streamlined vetting process. Initial aggregate investment quota: RMB 300
billion ($47 billion) each for inward and outward fund flows
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THE EXCHANGE RATE REGIME
1. In 2015 the reference price is no longer delinked from the previous day’s closing price as People's Bank of China (PBC) sets the opening price for trading on the Shanghai China Foreign Exchange Trading System (CFETS) each morning due to RMB trading now taking place in markets such as London that are in other time zone causing the two prices not necessarily be the same.
2. China’s currency move could be interpreted as a relatively modest and defensive one, aimed at signaling that the PBC would not persist in supporting the RMB’s value relative to the dollar if the dollar were to keep rising against other major currencies.
2. China’s currency move could be interpreted as a relatively modest and defensive one, aimed at signaling that the PBC would not persist in supporting the RMB’s value relative to the dollar if the dollar were to keep rising against other major currencies.
FINANCIAL SECTOR DEVELOPMENT AND REFORMS
1. Bank deposit and lending rates have now been fully liberalized. Commercial banks can now set rates freely, although the PBC still sets reference rates to guide banks. An explicit bank deposit insurance program has also been introduced.
2. China’s fixed income markets, especially for corporate debt, have developed considerably in the last few years when nonfinancial corporate debt was practically nonexistent a decade ago and China has recently lifted restrictions on foreign investors’ participation in its bond markets, which should improve both the depth and liquidity of these markets over time.
3. Reserve currency economies are expected to issue high-quality and creditworthy government debt or government-backed debt instruments that can serve to hedge against foreign investors’ domestic currency depreciation during a global downturn.
